Sequential Trading With Coarse Contingencies

Sarah Auster (), Jeremy Kettering () and Asen Kochov

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We consider a dynamic economy in which agents are initially unaware of some risks. As awareness of these risks emerges, markets re-open so agents can re-optimize and purchase insurance. An inefficiency may nonetheless arise as the cost of insurance is not spread over time. This ``savings mistake" does not arise in two benchmark cases. In those, the ability to re-trade fully negates the initial misperception of risks. We also demonstrate the possibility of unexpected default. This arises when agents borrow "too much" and once perceptions change, there is no equilibrium price at which they can refinance their debt.

Keywords: coarse perceptions; unforeseen risks; sequential trading; default (search for similar items in EconPapers)
JEL-codes: D50 D81 D83 (search for similar items in EconPapers)
Pages: 18
Date: 2021-01
New Economics Papers: this item is included in nep-ias and nep-ore
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Citations: View citations in EconPapers (1)

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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:bon:boncrc:crctr224_2021_254

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