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No-arbitrage, overlapping sets of priors and the existence of efficient allocations and equilibria in the presence of risk and ambiguity

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  • Dana, Rose-Anne
  • Le Van, Cuong

Abstract

The theory of existence of equilibrium with short-selling is reconsidered under risk and ambiguity modelled by risk averse variational preferences. A sufficient condition for existence of efficient allocations is that the relative interiors of the risk adjusted sets of expectations overlap. This condition is necessary if agents are not risk neutral at extreme levels of wealths either positive or negative. It is equivalent to the condition that there does not exist mutually compatible trades, with non negative expected value with respect to any risk adjusted prior, strictly positive for some agent and some prior. It is shown that the more uncertainty averse and the more risk averse, the more likely are efficient allocations and equilibria to exist.

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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/3162.

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Handle: RePEc:dau:papers:123456789/3162

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Keywords: Risque; Croyance commune; Equilibre avec ventes à découvert; Incertitude; Variational Preferences; Equilibria with Short-Selling; Common Prior; Risk; Uncertainty; Préférences variationnelles;

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