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Speculative trade under ambiguity

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  • Werner, Jan

Abstract

Ambiguous beliefs may lead to speculative trade and speculative bubbles. We demonstrate this by showing that the classical Harrison and Kreps (1978) example of speculative trade among agents with heterogeneous beliefs can be replicated with agents having common but ambiguous beliefs. More precisely, we show that the same asset prices and pattern of trade can be obtained in equilibrium with agents' having recursive multiple-prior expected utilities with common set of priors.

Suggested Citation

  • Werner, Jan, 2022. "Speculative trade under ambiguity," Journal of Economic Theory, Elsevier, vol. 199(C).
    • Handle: RePEc:eee:jetheo:v:199:y:2022:i:c:s002205312100017x
    DOI: 10.1016/j.jet.2021.105200
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    11. Wei Xiong & Jialin Yu, 2011. "The Chinese Warrants Bubble," American Economic Review, American Economic Association, vol. 101(6), pages 2723-2753, October.
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    Cited by:

    1. Yang Hao, 2023. "Financial Market with Learning from Price under Knightian Uncertainty," Working Papers hal-03686748, HAL.
    2. Sujoy Mukerji & Han N. Ozsoylev & Jean‐Marc Tallon, 2023. "Trading Ambiguity: A Tale Of Two Heterogeneities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(3), pages 1127-1164, August.

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    More about this item

    Keywords

    Speculative trade; Ambiguity; Speculative bubbles;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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