Ambiguity, Infra-Marginal Investors, and Market Prices
AbstractIt 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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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 13514.
Date of creation: 13 Jan 2009
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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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