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General equilibrium with endogenous uncertainty and default

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  • Chichilnisky, Graciela
  • Wu, Ho-Mou

Abstract

In this paper we study the introduction of new assets which are oftenly observed to be defined in expected values rather than state by state, called the Arrow-Lind-Malinvaud (ALM) assets. We demonstrate that individual default emerges naturally in an economy where such ALM assets are introduced without completing all contingency markets. We further provide conditions under which individual default is propagated endogenously into a collective risk of widespread default in general equilibrium.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 42 (2006)
Issue (Month): 4-5 (August)
Pages: 499-524

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Handle: RePEc:eee:mateco:v:42:y:2006:i:4-5:p:499-524

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Web page: http://www.elsevier.com/locate/jmateco

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References

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  1. Zame, William R, 1993. "Efficiency and the Role of Default When Security Markets Are Incomplete," American Economic Review, American Economic Association, American Economic Association, vol. 83(5), pages 1142-64, December.
  2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  3. Hildenbrand, Werner, 1971. "Random preferences and equilibrium analysis," Journal of Economic Theory, Elsevier, Elsevier, vol. 3(4), pages 414-429, December.
  4. Kurz, Mordecai, 1994. "On the Structure and Diversity of Rational Beliefs," Economic Theory, Springer, Springer, vol. 4(6), pages 877-900, October.
  5. Wu, Ho-Mou, 1988. "Unemployment equilibrium in a random economy," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 17(4), pages 385-400, September.
  6. Chichilnisky, Graciela, 1996. "Markets with endogenous uncertainty: theory and policy," MPRA Paper 8612, University Library of Munich, Germany.
  7. Graciela Chichilnisky & Geoffrey Heal, 1993. "Global Environmental Risks," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 7(4), pages 65-86, Fall.
  8. Svensson, Lars E O, 1981. "Efficiency and Speculation in a Model with Price-Contingent Contracts," Econometrica, Econometric Society, Econometric Society, vol. 49(1), pages 131-51, January.
  9. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2001. "Default and Punishment in General Equilibrium," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1304R5, Cowles Foundation for Research in Economics, Yale University, revised Mar 2004.
  10. Malinvaud, E., 1972. "The allocation of individual risks in large markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 312-328, April.
  11. Arrow, Kenneth J & Lind, Robert C, 1970. "Uncertainty and the Evaluation of Public Investment Decisions," American Economic Review, American Economic Association, American Economic Association, vol. 60(3), pages 364-78, June.
  12. Cass, David & Chichilnisky, Graciela & Wu, Ho-Mou, 1996. "Individual Risk and Mutual Insurance," Econometrica, Econometric Society, Econometric Society, vol. 64(2), pages 333-41, March.
  13. Ho-Mou Wu & Wen-Chung Guo, 2003. "Speculative trading with rational beliefs and endogenous uncertainty," Economic Theory, Springer, Springer, vol. 21(2), pages 263-292, 03.
  14. Malinvaud, E, 1973. "Markets for an Exchange Economy with Individual Risks," Econometrica, Econometric Society, Econometric Society, vol. 41(3), pages 383-410, May.
  15. Chichilnisky, G. & Wu, H.M., 1992. "Financial Innovation and Endogenous Uncertainty in Incomplete Asset Markets," Papers, Columbia - Graduate School of Business 92-30, Columbia - Graduate School of Business.
  16. repec:fth:coluec:645 is not listed on IDEAS
  17. Ho-Mou Wu & Wen-Chung Guo, 2004. "Asset price volatility and trading volume with rational beliefs," Economic Theory, Springer, Springer, vol. 23(4), pages 795-829, May.
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Citations

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Cited by:
  1. Chichilnisky, Graciela, 2010. "The foundations of statistics with black swans," Mathematical Social Sciences, Elsevier, Elsevier, vol. 59(2), pages 184-192, March.
  2. Hans Gersbach, 2013. "Preventing Banking Crises--with Private Insurance?," CESifo Economic Studies, CESifo, CESifo, vol. 59(4), pages 609-627, December.
  3. Chollete, Lorán, 2008. "The Propagation of Financial Extremes: An Application to Subprime Market Spillovers," Discussion Papers, Department of Business and Management Science, Norwegian School of Economics 2008/2, Department of Business and Management Science, Norwegian School of Economics.
  4. Chichilnisky, Graciela, 2009. "The topology of fear," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 45(12), pages 807-816, December.
  5. Chollete, Lorán, 2009. "The Propagation of Financial Extremes," Discussion Papers, Department of Business and Management Science, Norwegian School of Economics 2008/25, Department of Business and Management Science, Norwegian School of Economics.

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