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Endogenous indeterminacy and volatility of asset prices under ambiguity

  • Mandler, Michael

    ()

    (Department of Economics, Royal Holloway College, University of London)

If agents are ambiguity-averse and can invest in productive assets, asset prices can robustly exhibit indeterminacy in the markets that open after the productive investment has been launched. For indeterminacy to occur, the aggregate supply of goods must appear in precise configurations but the investment levels that generate these supplies arise systematically. That indeterminacy arises only at a knife-edge set of aggregate supplies allows for a simple explanation of the volatility of asset prices: small changes in supplies necessarily lead to a big price response.

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File URL: http://econtheory.org/ojs/index.php/te/article/viewFile/20130729/9495/287
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Article provided by Econometric Society in its journal Theoretical Economics.

Volume (Year): 8 (2013)
Issue (Month): 3 (September)
Pages:

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Handle: RePEc:the:publsh:1068
Contact details of provider: Web page: http://econtheory.org

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  1. repec:hal:journl:halshs-00174539 is not listed on IDEAS
  2. Chateauneuf, Alain & Dana, Rose-Anne & Tallon, Jean-Marc, 2000. "Optimal risk-sharing rules and equilibria with Choquet-expected-utility," Journal of Mathematical Economics, Elsevier, vol. 34(2), pages 191-214, October.
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  9. Dana, Rose-Anne, 2004. "Ambiguity, uncertainty aversion and equilibrium welfare," Economics Papers from University Paris Dauphine 123456789/5393, Paris Dauphine University.
  10. Sujoy Mukerji & Jean-Marc Tallon, 2003. "An overview of economic applications of David Schmeidler`s models of decision making under uncertainty," Economics Series Working Papers 165, University of Oxford, Department of Economics.
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  13. Jayant Ganguli & Scott Condie, 2012. "The pricing effects of ambiguous private information," Economics Discussion Papers 720, University of Essex, Department of Economics.
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