Sequential equilibrium without rational expectations of prices: A theorem of full existence

Lionel de Boisdeffre ()
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Lionel de Boisdeffre: Centre d'Economie de la Sorbonne, https://centredeconomiesorbonne.univ-paris1.fr

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: We consider a pure exchange economy, where agents, typically asymmetrically informed, exchange commodities, on spot markets, and securities of all kinds, on incomplete financial markets with no model of how future prices are determined. They have private characteristics, anticipations and beliefs. We show they face an incompressible uncertainty, represented by a so-called “minimum uncertainty set”, typically adding to the ‘exogenous uncertainty’, on tomorrow's state of nature, an ‘endogenous uncertainty’ on future spot prices, which may depend on every agent's private anticipations today. At equilibrium, all agents expect the ‘true’ price, in each realizable state, as a possible outcome, and elect optimal strategies, ex ante, which clear on all markets, ex post. Our main Theorem states that equilibrium exists as long as agents' prior anticipations, which may be refined from observing markets, embed that minimum uncertainty set. This result is stronger than the classical ones of generic existence, along Radner (1979), or Hart (1975), based on the rational expectations of prices

Keywords: sequential equilibrium; temporary equilibrium; perfect foresight; existence; rational expectations; financial markets; asymmetric information; arbitrage (search for similar items in EconPapers)
JEL-codes: D52 (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-mic and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:17036

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