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 securities, on financial markets and commodities, on spot markets. Consumers have private characteristics, anticipations and beliefs and no model to forecast prices. They are dispensed with rational expectation and bounded rationality assumptions, such as Radner's (1972, 1979), Kurz' (1994) or Koutsougeras-Yannelis' (1999). We show that they face an incompressible uncertainty represented by a so-called "minimum uncertainty set". This uncertainty typically adds to the exogenous one, on the state of nature, an ‘endogenous uncertainty’ over future spot prices. At equilibrium, all agents expect the ‘true’ price on every spot market as a possible outcome and elect optimal strategies, ex ante, which clear on all markets ex post. We show this sequential equilibrium exists whenever agents' prior anticipations embed the minimum uncertainty set. This outcome differs from the standard generic existence results of Hart (1975), Radner (1979) and Duffie-Shaffer (1985), among others, 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)
Pages: 37 pages
Date: 2017-07, Revised 2018-06
New Economics Papers: this item is included in nep-upt
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