Equilibrium prices and trade under ambiguous volatility
Patrick Beissner ()
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Patrick Beissner: Australian National University
Economic Theory, 2017, vol. 64, issue 2, 213-238
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.
Keywords: Knightian uncertainty; Variational preferences; General equilibrium; Singular priors; Ambiguous volatility; Insurance under ambiguity; Equilibrium price systems (search for similar items in EconPapers)
JEL-codes: G10 D50 C62 (search for similar items in EconPapers)
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