Price Uncertainty and Price-Contingent Securities

Geoffrey Heal

No 23723, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: I extend the classical general equilibrium treatment of uncertainty about exogenous states of nature to uncertainty about prices. Traders do not know the prices at which markets will clear but have expectations over possible prices. They trade price-contingent securities (derivatives) to insure against the risks arising from this uncertainty. I establish four results. One is set of conditions that are necessary and sufficient for the existence of equilibrium (called an equilibrium with price insurance) in this framework. A second is that equilibria with price insurance are Pareto efficient. I give conditions under which agents are fully insured at an equilibrium. Finally I show that agents' price expectations matter in the sense that they affect the equilibrium allocation of resources, and that the existence of price-contingent securities alters the equilibrium of the underlying real economy.

JEL-codes: D5 D53 G13 (search for similar items in EconPapers)
Date: 2017-08
New Economics Papers: this item is included in nep-mic
Note: AP CF
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