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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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 and Growth
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
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.:
- Dumas, Bernard & Uppal, Raman & Wang, Tan, 2000.
"Efficient Intertemporal Allocations with Recursive Utility,"
Journal of Economic Theory,
Elsevier, vol. 93(2), pages 240-259, August.
- Bernard Dumas & Raman Uppal & Tan Wang, 1998. "Efficient Intertemporal Allocations with Recursive Utility," NBER Technical Working Papers 0231, National Bureau of Economic Research, Inc.
- Shiller, Robert J & Kon-Ya, Fumiko & Tsutsui, Yoshiro, 1996. "Why Did the Nikkei Crash? Expanding the Scope of Expectations Data Collection," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 156-64, February.
- Campbell, John Y., 1999.
"Asset prices, consumption, and the business cycle,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 19, pages 1231-1303
- Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
- Duffie, Darrell & Epstein, Larry G, 1992. "Stochastic Differential Utility," Econometrica, Econometric Society, vol. 60(2), pages 353-94, March.
- Hansen, Lars Peter & Sargent, Thomas J & Tallarini, Thomas D, Jr, 1999.
"Robust Permanent Income and Pricing,"
Review of Economic Studies,
Wiley Blackwell, vol. 66(4), pages 873-907, October.
- Lars Peter Hansen & Thomas J. Sargent & Thomas D. Tallarini Jr., 1997. "Robust Permanent Income and Pricing," Levine's Working Paper Archive 596, David K. Levine.
- Lars Hansen & Thomas Sargent & Thomas Tallarini, . "Robust Permanent Income and Pricing," GSIA Working Papers 1997-51, Carnegie Mellon University, Tepper School of Business.
- Basak, Suleyman, 2000. "A model of dynamic equilibrium asset pricing with heterogeneous beliefs and extraneous risk," Journal of Economic Dynamics and Control, Elsevier, vol. 24(1), pages 63-95, January.
- Zengjing Chen & Larry G. Epstein, 2000.
"Ambiguity, risk and asset returns in continuous time,"
RCER Working Papers
474, University of Rochester - Center for Economic Research (RCER).
- Zengjing Chen & Larry Epstein, 2002. "Ambiguity, Risk, and Asset Returns in Continuous Time," Econometrica, Econometric Society, vol. 70(4), pages 1403-1443, July.
- Kenneth R. French & James M. Poterba, 1991.
"Investor Diversification and International Equity Markets,"
NBER Working Papers
3609, National Bureau of Economic Research, Inc.
- French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-26, May.
- Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
- Brennan, Michael J & Cao, H Henry, 1997.
" International Portfolio Investment Flows,"
Journal of Finance,
American Finance Association, vol. 52(5), pages 1851-80, December.
- N. El Karoui & S. Peng & M. C. Quenez, 1997. "Backward Stochastic Differential Equations in Finance," Mathematical Finance, Wiley Blackwell, vol. 7(1), pages 1-71.
- Philip H. Dybvig & Chi-fu Huang, 1988.
"Nonnegative Wealth, Absence of Arbitrage, and Feasible Consumption Plans,"
Cowles Foundation Discussion Papers
860, Cowles Foundation for Research in Economics, Yale University.
- Philip H. Dybvig, Chi-fu Huang, 1988. "Nonnegative Wealth, Absence of Arbitrage, and Feasible Consumption Plans," Review of Financial Studies, Society for Financial Studies, vol. 1(4), pages 377-401.
- Duffie, Darrell & Epstein, Larry G, 1992. "Asset Pricing with Stochastic Differential Utility," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 411-36.
- Duffie, Darrel & Lions, Pierre-Louis, 1992. "PDE solutions of stochastic differential utility," Journal of Mathematical Economics, Elsevier, vol. 21(6), pages 577-606.
- Zapatero, Fernando, 1998. "Effects of financial innovations on market volatility when beliefs are heterogeneous," Journal of Economic Dynamics and Control, Elsevier, vol. 22(4), pages 597-626, April.
- Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
- Jiang, Wang, 1996. "The term structure of interest rates in a pure exchange economy with heterogeneous investors," Journal of Financial Economics, Elsevier, vol. 41(1), pages 75-110, May.
- Epstein, Larry G. & Schneider, Martin, 2003.
Journal of Economic Theory,
Elsevier, vol. 113(1), pages 1-31, November.
- Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
- Mark Grinblatt, 2001. "How Distance, Language, and Culture Influence Stockholdings and Trades," Journal of Finance, American Finance Association, vol. 56(3), pages 1053-1073, 06.
- Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gabriel Mihalache).
If references are entirely missing, you can add them using this form.