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Speculative Trade Equilibria with Incorrect Price Anticipations

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  • Alexander Zimper

    ()
    (Department of Economics, University of Pretoria)

Abstract

This paper introduces an equilibrium concept for boundedly rational agents who base their demand-supply decisions on incorrect price anticipations. Formally, we differentiate between equilibrium and out-of-equilibrium states. If the agents attach zero prior probability to all out-of-equilibrium states, our equilibrium concept coincides with Radner's (1979) concept of rational expectations equilibria (=REE). In contrast to REE, however, there may exist strict incentives for speculative asset trade whenever boundedly rational agents regard out-of-equilibrium states as possible.

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File URL: http://www.econrsa.org/node/731
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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201335.

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Length: 10 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:pre:wpaper:201335

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Keywords: Bounded Rationality; Speculative Trade; Rational Expectations; Incorrect Prices;

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Cited by:
  1. Alexander Zimper, 2013. "On the impossibility of insider trade in rational expectations equilibria," Working Papers 201379, University of Pretoria, Department of Economics.

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