Pricing interest rate derivatives under volatility uncertainty

Abstract In this paper, we study the pricing of contracts in fixed income markets under volatility uncertainty sense Knightian or model uncertainty. The starting point is an arbitrage-free bond market about modeled by a G -Brownian motion, which drives forward rate dynamics. absence arbitrage ensured drift condition. Such setting leads to sublinear measure for additional contracts, yields either single price range prices and provides connection hedging prices. Similar approach, define expectation simplify cashflows. Under expectation, obtain robust version expectations hypothesis, show how options on addition, develop methods consisting stream cashflows, since nonlinearity implies that cannot cashflows each cashflow separately. With these tools, derive formulas all major interest derivatives. provide link traditional models without naturally unspanned stochastic volatility.