Sequential trading with coarse contingencies

Sarah Auster, Jeremy Kettering and Asen Kochov

Journal of Economic Theory, 2024, vol. 220, issue C

Abstract: We consider a dynamic pure exchange economy in which agents have a coarse perception of the future, and awareness emerges gradually over time. We make the key assumption that awareness of a shock to agents' endowments emerges before the shock hits, so agents can adapt by purchasing (or selling) insurance. We provide an irrelevance theorem showing that, under suitable conditions, unawareness matters if and only if it concerns aggregate shocks. In particular, if the unforeseen endowment shocks are purely idiosyncratic, there is no loss of efficiency with respect to the economy with perfect foresight. Building on this result, we show three key implications of unforeseen aggregate shocks: the possibility of non-comonotonic consumption allocations, a systematic bias in asset prices that gives rise to opportunities for intertemporal arbitrage, and the potential of unexpected default due to the agents' inability to repay (roll over) prior debt.

Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053124000802
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Sequential Trading With Coarse Contingencies (2022)
Working Paper: Sequential Trading with Coarse Contingencies (2021)
Working Paper: Sequential Trading With Coarse Contingencies (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:220:y:2024:i:c:s0022053124000802

DOI: 10.1016/j.jet.2024.105874

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().