A Two-Person Dynamic Equilibrium under Ambiguity

Larry Epstein and Jianjun Miao

No 478, RCER Working Papers from University of Rochester - Center for Economic Research (RCER)

Abstract: This paper describes a pure-exchange, continuous-time economy with two heterogeneous agents and complete markets. A novel feature of the economy is that agents perceive some security returns as ambiguous in the sense often attributed to frank Knight. The equilibrium is described completely in closed-form. In particular, closed-form solutions are obtained for the equilibrium processes describing individual consumption, the interest rate, the market price of uncertainty, security prices and trading strategies. After identifying agents as countries, the model is applied to address the consumption home-bias puzzles.

Keywords: ambiguity; risk; continuous-time; asset returns; Knightian uncertainty; dynamic equilibrium; home bias (search for similar items in EconPapers)
JEL-codes: D8 D9 G11 G12 G15 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2001-01
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (18)

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Journal Article: A two-person dynamic equilibrium under ambiguity (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:roc:rocher:478

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