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Endogenous indeterminacy and volatility of asset prices under ambiguity

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  • 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/viewForthcomingFile/1068/7252/1
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Bibliographic Info

Article provided by Econometric Society in its journal Theoretical Economics.

Volume (Year): (Forthcoming)
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Handle: RePEc:the:publsh:1068

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Related research

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

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References

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  1. Tallon, Jean-Marc & Dana, Rose-Anne & Chateauneuf, Alain, 2000. "Optimal risk-sharing rules and equilibria with Choquet-expected-utility," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/5461, Université Paris-Dauphine.
  2. repec:oxf:wpaper:046 is not listed on IDEAS
  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. repec:hal:journl:halshs-00451997 is not listed on IDEAS
  5. Mukerji, S. & Tallon, J.-M., 1999. "Ambiguity Aversion and Incompleteness of Financial Markets," Papiers d'Economie Mathématique et Applications 1999-28, Université Panthéon-Sorbonne (Paris 1).
  6. 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.
  7. Mandler Michael, 1995. "Sequential Indeterminacy in Production Economies," Journal of Economic Theory, Elsevier, vol. 66(2), pages 406-436, August.
  8. Jayant Ganguli & Scott Condie, 2012. "The pricing effects of ambiguous private information," Economics Discussion Papers 720, University of Essex, Department of Economics.
  9. Rigotti, Luca & Shannon, Chris, 2012. "Sharing risk and ambiguity," Journal of Economic Theory, Elsevier, vol. 147(5), pages 2028-2039.
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Cited by:
  1. Jayant Ganguli & Scott Condie, 2012. "The pricing effects of ambiguous private information," Economics Discussion Papers 720, University of Essex, Department of Economics.

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