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Markets with endogenous uncertainty: theory and policy

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Author Info
Chichilnisky, Graciela

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Abstract

Classic formulations of markets regard uncertainty as originating from acts of nature. I extend this to a formulation of markets which face risks induces by the economy itself, such as the environmental risks of atmospheric and climate change induced by CFC and CO2 emissions. I formulate and prove the existence of a general competitive equilibrium where the state space and the probabilities of events are endogenously determines as part of the equilibrium. Traders take optimal positions with respect to the uncertainty which their own actions induce. The equilibrium allocations are efficient in a restricted sense. I show that scientific uncertainty can be fully hedged. However uncertainty induced by the unknown level of output at an equilibrium cannot be hedged fully. I discuss applications for CAT Futures, recently introduced on the Chicago Board of Trade, and to international environmental strategies.

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File URL: http://mpra.ub.uni-muenchen.de/8612/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8612.

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Date of creation: 1996
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Handle: RePEc:pra:mprapa:8612

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Related research
Keywords: endogenous uncertainty; markets general equilibrium; financial innovation; CAT futures;

Find related papers by JEL classification:
R13 - Urban, Rural, and Regional Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Chichilnisky, Graciela, 1977. "Spaces of economic agents," Journal of Economic Theory, Elsevier, vol. 15(1), pages 160-173, June. [Downloadable!] (restricted)
  2. Chichilnisky, G. & Heal, G., 1992. "Financial Markets for Unknown Risks," Discussion Papers 1992_31, Columbia University, Department of Economics.
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  3. Chichilnisky, Graciela, 1997. "Limited arbitrage is necessary and sufficient for the existence of an equilibrium," Journal of Mathematical Economics, Elsevier, vol. 28(4), pages 470-479, November. [Downloadable!] (restricted)
  4. Stein, Jerome L, 1992. "Price Discovery Processes," The Economic Record, The Economic Society of Australia, vol. 0(0), pages 34-45, Supplemen.
  5. Chichilnisky, G, 1996. "A Unified Perspective on Resource Allocation : Limited Arbitrage is Necessary and Sufficient for the Existence of a Competitive Equilibrium, the Core and Social Choice," Papers 96-20, Columbia - Graduate School of Business.
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  6. Chichilnisky, Graciela, 1994. "Social Diversity, Arbitrage, and Gains from Trade: A Unified Perspective on Resource Allocation," American Economic Review, American Economic Association, vol. 84(2), pages 427-34, May. [Downloadable!] (restricted)
  7. Wilson, Robert, 1992. "Strategic analysis of auctions," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 8, pages 227-279 Elsevier. [Downloadable!] (restricted)
  8. Chichilnisky, G. & Heal, G., 1993. "Global Environmental Risks," Discussion Papers 1993_03, Columbia University, Department of Economics.
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  9. Chichilnisky, G. & Heal, G. & Streufert, P.A. & Swinkels, J.M., 1992. "Believing in Multiple Equilibria," Papers 92-32, Columbia - Graduate School of Business.
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  10. Fudenberg, Drew & Holmstrom, Bengt & Milgrom, Paul, 1990. "Short-term contracts and long-term agency relationships," Journal of Economic Theory, Elsevier, vol. 51(1), pages 1-31, June. [Downloadable!] (restricted)
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  11. Chichilnisky Graciela & Heal Geoffrey M., 1993. "Competitive Equilibrium in Sobolev Spaces without Bounds on Short Sales," Journal of Economic Theory, Elsevier, vol. 59(2), pages 364-384, April. [Downloadable!] (restricted)
  12. Cass, David & Chichilnisky, Graciela & Wu, Ho-Mou, 1996. "Individual Risk and Mutual Insurance," Econometrica, Econometric Society, vol. 64(2), pages 333-41, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Chichilnisky, Graciela & Heal, Geoffrey, 1998. "Managing unknown risks: the future of global reinsurance," MPRA Paper 8820, University Library of Munich, Germany. [Downloadable!]
  2. Graciela Chichilnisky & Ho-Mou Wu, 2006. "General equilibrium with endogenous uncertainty and default," Discussion Papers 0506-29, Columbia University, Department of Economics. [Downloadable!]
    Other versions:
  3. Cornelis A. Los, 2004. "Measuring Financial Cash Flow and Term Structure Dynamics," Finance 0409046, EconWPA. [Downloadable!]
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