A Two-Person Dynamic Equilibrium under Ambiguity
AbstractThis paper describes a pure-exchange, continuous-time economy with two heterogeneous agents and complete markets. A novel feature of the economy is that agents perceive some security returns as ambiguous in the sense often attributed to frank Knight. The equilibrium is described completely in closed-form. In particular, closed-form solutions are obtained for the equilibrium processes describing individual consumption, the interest rate, the market price of uncertainty, security prices and trading strategies. After identifying agents as countries, the model is applied to address the consumption home-bias puzzles.
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Bibliographic InfoPaper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 478.
Length: 49 pages
Date of creation: Jan 2001
Date of revision:
Contact details of provider:
Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.
ambiguity; risk; continuous-time; asset returns; Knightian uncertainty; dynamic equilibrium; home bias;
Other versions of this item:
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D9 - Microeconomics - - Intertemporal Choice
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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