Sequential Trading with Coarse Contingencies

Sarah Auster (), Jeremy Kettering () and Asen Kochov
Additional contact information
Sarah Auster: Department of Economics, University of Bonn
Jeremy Kettering: Department of Economics, University of Rochester

No 52, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: We consider a dynamic pure exchange economy in which agents have a coarse perception of the future and, in particular, may be unaware of some risks. As awareness of these risks emerges, markets have to re-open to allow the agents to re-optimize and purchase insurance. The paper provides an irrel-evance theorem, showing that if unforeseen shocks are purely idiosyncratic and agents become aware of them before they occur, then unawareness does not affect equilibrium consumption. Unawareness thus matters only if it concerns aggregate shocks. Building on this insight, we highlight several interesting im-plications for economies with unforeseen aggregate shocks: the agents’ failure to spread the cost of insurance efficiently across time, heterogeneous consump-tion growth rates, systematically biased price expectations and the possibility of unexpected default.

Keywords: coarse perceptions; unforeseen risks; sequential trading; default (search for similar items in EconPapers)
Pages: 38 pages
Date: 2021-01
New Economics Papers: this item is included in nep-cwa
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_052_2021.pdf Third version, 2022 (application/pdf)

Related works:
Journal Article: Sequential trading with coarse contingencies (2024)
Working Paper: Sequential Trading With Coarse Contingencies (2022)
Working Paper: Sequential Trading With Coarse Contingencies (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:052

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