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Endogenous indeterminacy and volatility of asset prices under ambiguity

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Author Info

  • Mandler, Michael

    ()
    (Department of Economics, Royal Holloway College, University of London)

Abstract

If agents are ambiguity-averse and can invest in productive assets, asset prices can robustly exhibit indeterminacy in the markets that open after the productive investment has been launched. For indeterminacy to occur, the aggregate supply of goods must appear in precise configurations but the investment levels that generate these supplies arise systematically. That indeterminacy arises only at a knife-edge set of aggregate supplies allows for a simple explanation of the volatility of asset prices: small changes in supplies necessarily lead to a big price response.

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File URL: http://econtheory.org/ojs/index.php/te/article/viewFile/20130729/9495/287
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Bibliographic Info

Article provided by Econometric Society in its journal Theoretical Economics.

Volume (Year): 8 (2013)
Issue (Month): 3 (September)
Pages:

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Handle: RePEc:the:publsh:1068

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Web page: http://econtheory.org

Related research

Keywords: Ambiguity aversion; asset pricing; indeterminacy; excess volatility; general equilibrium;

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References

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  1. Alain Chateauneuf & Rose Anne Dana & Jean-Marc Tallon, 2000. "Optimal risk-sharing rules and equilibria with Choquet-expected-utility," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00451997, HAL.
  2. Sujoy Mukerji & Jean-Marc Tallon, 2000. "Ambiguity Aversion and Incompleteness of Financial Markets," Economics Series Working Papers 46, University of Oxford, Department of Economics.
  3. Rigotti, Luca & Shannon, Chris, 2001. "Uncertainty and Risk in Financial Markets," Department of Economics, Working Paper Series qt7pp7113z, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Dana, Rose-Anne, 2004. "Ambiguity, uncertainty aversion and equilibrium welfare," Economics Papers from University Paris Dauphine 123456789/5393, Paris Dauphine University.
  5. Sujoy Mukerji & Jean-Marc Tallon, 2003. "An overview of economic applications of David Schmeidler`s models of decision making under uncertainty," Economics Series Working Papers 165, University of Oxford, Department of Economics.
  6. Mandler Michael, 1995. "Sequential Indeterminacy in Production Economies," Journal of Economic Theory, Elsevier, vol. 66(2), pages 406-436, August.
  7. Jayant Ganguli & Scott Condie, 2012. "The pricing effects of ambiguous private information," Economics Discussion Papers 720, University of Essex, Department of Economics.
  8. repec:oxf:wpaper:046 is not listed on IDEAS
  9. Rigotti, Luca & Shannon, Chris, 2012. "Sharing risk and ambiguity," Journal of Economic Theory, Elsevier, vol. 147(5), pages 2028-2039.
  10. Alain Chateauneuf & Rose Anne Dana & Jean-Marc Tallon, 2000. "Optimal risk-sharing rules and equilibria with Choquet-expected-utility," Post-Print halshs-00451997, HAL.
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Cited by:
  1. Scott Condie & Jayant Ganguli, 2012. "The Pricing Effects of Ambiguous Private Information," INET Research Notes 16, Institute for New Economic Thinking (INET).
  2. Eisei Ohtaki & Hiroyuki Ozaki, 2013. "Monetary Equilibria and Knightian Uncertainty," Keio/Kyoto Joint Global COE Discussion Paper Series 2012-032, Keio/Kyoto Joint Global COE Program.

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