Risk-Free Bond Prices in Incomplete Markets with Recursive Utility Functions and Multiple Beliefs
AbstractWe consider an exchange economy under uncertainty, in which agents' utility functions exhibit constant absolute risk aversion, but they may be recursive and the expected utility calculation may be based on multiple subjective beliefs. The risk aversion coefficients, subjective beliefs, subjective time discount factors, initial endowments, and tradeable assets may differ across agents. We prove that the risk-free bond price goes down (and the interest rate goes up) monotonically as the markets become more complete. We find the range of equilibrium bond prices that depends on the primitives of the economy but not on the structures of financial markets.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 590.
Length: 24 pages
Date of creation: May 2004
Date of revision:
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Postal: Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501
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More information through EDIRC
multiple priors; no trade; dynamic consistency; interim efficiency; rectangularityi;
Find related papers by JEL classification:
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-09 (All new papers)
- NEP-FIN-2005-12-09 (Finance)
- NEP-FMK-2005-12-09 (Financial Markets)
- NEP-MAC-2005-12-09 (Macroeconomics)
- NEP-UPT-2005-12-09 (Utility Models & Prospect Theory)
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