Financial markets and Keynes’s long-term expectations

Marcello Basili and Carlo Zappia

Cambridge Journal of Economics, 2021, vol. 45, issue 5, 1047-1067

Abstract: This paper presents an intuitive way to represent Keynes’s theory of expectations and its implications for financial markets. Further to a suggestion by Ellsberg, a coherent expectational function for the valuation of assets under Keynesian uncertainty is derived. By following the thread that goes from the non-numerical probabilities of the Treatise on Probability to the expectations of the General Theory, this paper suggests that a function accounting for Keynesian expectations can be modelled by using a class of the so-called ε-contaminated probability priors, where the parameter ε is suggestive of the quality of information about the relevant odds.

Keywords: Uncertainty; Expectations; Keynes; Beauty contest; ε-Contamination (search for similar items in EconPapers)
Date: 2021
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