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Can future systemic financial risks be quantified? Ergodic vs nonergodic stochastic processes

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  • Paul Davidson

Abstract

Different axioms underlie efficient market theory and Keynes’s liquidity preference theory. Efficient market theory assumes the ergodic axiom. Consequently, today’s decision makers can calculate with actuarial precision the future value of all possible outcomes resulting from today’s decisions. Since in an efficient market world decision makers “know” their intertemporal budget constraints, decision makers never default on a loan, i.e., systemic defaults, insolvencies, and bankruptcies are impossible. Keynes liquidity preference theory rejects the ergodic axiom. The future is ontologically uncertain. Accordingly systemic defaults and insolvencies can occur but can never be predicted in advance. JEL Classification: G1; D80; E1.

Suggested Citation

  • Paul Davidson, 2009. "Can future systemic financial risks be quantified? Ergodic vs nonergodic stochastic processes," Brazilian Journal of Political Economy, Center of Political Economy, vol. 29(4), pages 324-340.
    • Handle: RePEc:ekm:repojs:v:29:y:2009:i:4:p:324-340:id:500
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    Cited by:

    1. Lukas Maslo & Zdenek Chytil, 2016. "Some Reflections on Methodology of Critical Realism," Proceedings of Economics and Finance Conferences 3205937, International Institute of Social and Economic Sciences.

    More about this item

    Keywords

    ergodic axiom; efficient market theory; probabilistic risk; uncertainty;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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