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Ambiguity, Infra-Marginal Investors, and Market Prices

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Author Info
Siddiqi, Hammad

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Abstract

It is difficult to explain the price insensitive or infra-marginal behavior, an example of which is the behavior of credit markets during the recent financial crisis, by risk aversion alone. It is known that infra-marginal behavior may arise with ambiguity aversion. Furthermore, there appears to be fairly strong evidence of a close connection between ambiguity and conformity. Here we propose an extension of the standard ambiguity framework to incorporate conformity. We find that there are open sets of state-price ratios over which the entire market is price insensitive or infra-marginal. This result has important implications for market equilibrium and volatility

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13514.

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Date of creation: 13 Jan 2009
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Handle: RePEc:pra:mprapa:13514

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Related research
Keywords: Ambiguity; Infra-Marginal Behavior; Arrow Securities;

Find related papers by JEL classification:
G0 - Financial Economics - - General
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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  1. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March. [Downloadable!] (restricted)
  2. Fabio Trojani & Markus Leippold & Paolo Vanini, 2005. "Learning and Asset Prices under Ambiguous Information," University of St. Gallen Department of Economics working paper series 2005 2005-03, Department of Economics, University of St. Gallen. [Downloadable!]
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This page was last updated on 2009-11-9.

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