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General equilibrium with endogenous uncertainty and default

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  • Graciela Chichilnisky

    ()
    (Columbia University - Program on Information and Resources)

  • Ho-Mou Wu

    ()
    (National Taiwan University - College of Management)

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

Paper provided by Columbia University, Department of Economics in its series Discussion Papers with number 0506-29.

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Length: 37 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:clu:wpaper:0506-29

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References

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  1. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  2. William R. Zame, 1992. "Efficiency and the Role of Default When Security Markets are Incomplete," UCLA Economics Working Papers 673, UCLA Department of Economics.
  3. Svensson, Lars E O, 1981. "Efficiency and Speculation in a Model with Price-Contingent Contracts," Econometrica, Econometric Society, vol. 49(1), pages 131-51, January.
  4. Ho-Mou Wu & Wen-Chung Guo, 2003. "Speculative trading with rational beliefs and endogenous uncertainty," Economic Theory, Springer, vol. 21(2), pages 263-292, 03.
  5. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2005. "Default and Punishment in General Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 1-37, 01.
  6. Malinvaud, E, 1973. "Markets for an Exchange Economy with Individual Risks," Econometrica, Econometric Society, vol. 41(3), pages 383-410, May.
  7. Kurz, Mordecai, 1994. "On the Structure and Diversity of Rational Beliefs," Economic Theory, Springer, vol. 4(6), pages 877-900, October.
  8. Graciela Chichilnisky & Geoffrey Heal, 1993. "Global Environmental Risks," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 65-86, Fall.
  9. Ho-Mou Wu & Wen-Chung Guo, 2004. "Asset price volatility and trading volume with rational beliefs," Economic Theory, Springer, vol. 23(4), pages 795-829, May.
  10. Wu, Ho-Mou, 1988. "Unemployment equilibrium in a random economy," Journal of Mathematical Economics, Elsevier, vol. 17(4), pages 385-400, September.
  11. Malinvaud, E., 1972. "The allocation of individual risks in large markets," Journal of Economic Theory, Elsevier, vol. 4(2), pages 312-328, April.
  12. Cass, David & Chichilnisky, Graciela & Wu, Ho-Mou, 1996. "Individual Risk and Mutual Insurance," Econometrica, Econometric Society, vol. 64(2), pages 333-41, March.
  13. Hildenbrand, Werner, 1971. "Random preferences and equilibrium analysis," Journal of Economic Theory, Elsevier, vol. 3(4), pages 414-429, December.
  14. repec:fth:coluec:645 is not listed on IDEAS
  15. Chichilnisky, Graciela, 1996. "Markets with endogenous uncertainty: theory and policy," MPRA Paper 8612, University Library of Munich, Germany.
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Cited by:
  1. Chollete, Lorán, 2008. "The Propagation of Financial Extremes: An Application to Subprime Market Spillovers," Discussion Papers 2008/2, Department of Business and Management Science, Norwegian School of Economics.
  2. Chichilnisky, Graciela, 2009. "The topology of fear," Journal of Mathematical Economics, Elsevier, vol. 45(12), pages 807-816, December.
  3. Chollete, Lorán, 2009. "The Propagation of Financial Extremes," Discussion Papers 2008/25, Department of Business and Management Science, Norwegian School of Economics.
  4. Hans Gersbach, 2013. "Preventing Banking Crises--with Private Insurance?," CESifo Economic Studies, CESifo, vol. 59(4), pages 609-627, December.
  5. Chichilnisky, Graciela, 2010. "The foundations of statistics with black swans," Mathematical Social Sciences, Elsevier, vol. 59(2), pages 184-192, March.

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