Equilibrium prices and trade under ambiguous volatility

Equilibrium prices and trade under ambiguous volatility This article considers general equilibrium economies with a primitive uncertainty model that features ambiguity about continuous-time volatility. For the resulting non-equivalence of priors, an appropriate commodity-price space is introduced. Agents are heterogeneous in the size of captured ambiguity, endowment and preference for risk and ambiguity. Preferences are of variational type à la Maccheroni et al. (Econometrica 74(6):1447–1498, 2006). One important implication involves a problematic aspect of linear equilibrium price systems. Positive payoffs are for free on events outside the domain of the representing equilibrium pricing measure. Moreover, when aggregate risk is present and aggregate ambiguity is absent, the insurance properties of optimal allocations depend on the notion of ambiguity-free payoffs. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Economic Theory Springer Journals

Equilibrium prices and trade under ambiguous volatility

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Publisher
Springer Berlin Heidelberg
Copyright
Copyright © 2016 by Springer-Verlag Berlin Heidelberg
Subject
Economics; Economic Theory/Quantitative Economics/Mathematical Methods; Game Theory, Economics, Social and Behav. Sciences; Microeconomics; Public Finance
ISSN
0938-2259
eISSN
1432-0479
D.O.I.
10.1007/s00199-016-0979-y
Publisher site
See Article on Publisher Site

Abstract

This article considers general equilibrium economies with a primitive uncertainty model that features ambiguity about continuous-time volatility. For the resulting non-equivalence of priors, an appropriate commodity-price space is introduced. Agents are heterogeneous in the size of captured ambiguity, endowment and preference for risk and ambiguity. Preferences are of variational type à la Maccheroni et al. (Econometrica 74(6):1447–1498, 2006). One important implication involves a problematic aspect of linear equilibrium price systems. Positive payoffs are for free on events outside the domain of the representing equilibrium pricing measure. Moreover, when aggregate risk is present and aggregate ambiguity is absent, the insurance properties of optimal allocations depend on the notion of ambiguity-free payoffs.

Journal

Economic TheorySpringer Journals

Published: Jun 16, 2016

References

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