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General equilibrium, risk taking and volatility

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  • Araujo A.
  • Chateauneuf A.
  • Gama-Torres J.
  • Novinski R.

Abstract

Although it is a phenomenon that is routinely observed in financial markets, the interaction between ambiguity averse and ambiguity lovers was not yet analyzed extensively in the literature of general equilibrium, mainly due to technical issues. In this paper, we show that the wealth aggregate risk plays a role on the existence of equilibrium in Arrow-Debreu economies. Moreover, we study properties of the equilibrium allocations such as condition for risk sharing, and the price behavior in equilibrium in presence of regulation, i.e., state price volatility when regulation is increased, and, for preferences with distorted probabilities with CARA utility functions, the decomposition of risk factor and ambiguity factor in these prices.

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Bibliographic Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-181.

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Length: 34 pages
Date of creation: 25 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-181

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  1. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  2. Sujoy Mukerji & Peter Klibanoff, 2002. "A Smooth Model of Decision,Making Under Ambiguity," Economics Series Working Papers 113, University of Oxford, Department of Economics.
  3. Strzalecki, Tomasz & Werner, Jan, 2011. "Efficient allocations under ambiguity," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1173-1194, May.
  4. Anderson, Robert M, 1985. "Strong Core Theorems with Nonconvex Preferences," Econometrica, Econometric Society, vol. 53(6), pages 1283-94, November.
  5. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Econometrica, Econometric Society, vol. 74(6), pages 1447-1498, November.
  6. Shannon, Chris & Strzalecki, Tomasz & Rigotti, Luca, 2008. "Subjective Beliefs and Ex Ante Trade," Scholarly Articles 3637104, Harvard University Department of Economics.
  7. repec:hal:journl:halshs-00451997 is not listed on IDEAS
  8. Strzalecki, Tomasz & Werner, Jan, 2011. "Efficient Allocations under Ambiguity," Scholarly Articles 11352637, Harvard University Department of Economics.
  9. Chateauneuf, Alain & Dana, Rose-Anne & Tallon, Jean-Marc, 2000. "Optimal risk-sharing rules and equilibria with Choquet-expected-utility," Journal of Mathematical Economics, Elsevier, vol. 34(2), pages 191-214, October.
  10. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
  11. 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.
  12. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
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