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Financial markets and Keynes’s long-term expectations

Author

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  • Marcello Basili
  • Carlo Zappia

Abstract

This paper presents an intuitive way to represent Keynes’s theory of expectations and its implications for financial markets. Further to a suggestion by Ellsberg, a coherent expectational function for the valuation of assets under Keynesian uncertainty is derived. By following the thread that goes from the non-numerical probabilities of the Treatise on Probability to the expectations of the General Theory, this paper suggests that a function accounting for Keynesian expectations can be modelled by using a class of the so-called ε-contaminated probability priors, where the parameter ε is suggestive of the quality of information about the relevant odds.

Suggested Citation

  • Marcello Basili & Carlo Zappia, 2021. "Financial markets and Keynes’s long-term expectations," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 45(5), pages 1047-1067.
    • Handle: RePEc:oup:cambje:v:45:y:2021:i:5:p:1047-1067.
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    File URL: http://hdl.handle.net/10.1093/cje/beab013
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    Cited by:

    1. Carlo Zappia, 2021. "Keynes's Treatise on Probability at 100 Years: Its Most Enduring Message," GREDEG Working Papers 2021-36, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.

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