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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.

Suggested Citation

  • Mandler, Michael, 2013. "Endogenous indeterminacy and volatility of asset prices under ambiguity," Theoretical Economics, Econometric Society, vol. 8(3), September.
  • Handle: RePEc:the:publsh:1068

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    References listed on IDEAS

    1. repec:dau:papers:123456789/5393 is not listed on IDEAS
    2. Luca Rigotti & Chris Shannon, 2005. "Uncertainty and Risk in Financial Markets," Econometrica, Econometric Society, vol. 73(1), pages 203-243, January.
    3. Sujoy Mukerji & Jean-Marc Tallon, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," Review of Economic Studies, Oxford University Press, vol. 68(4), pages 883-904.
    4. 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.
    5. 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.
    6. Mandler Michael, 1995. "Sequential Indeterminacy in Production Economies," Journal of Economic Theory, Elsevier, vol. 66(2), pages 406-436, August.
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    8. Ganguli, Jayant & Condie, Scott, 2012. "The pricing effects of ambiguous private information," Economics Discussion Papers 5631, University of Essex, Department of Economics.
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    10. Rigotti, Luca & Shannon, Chris, 2012. "Sharing risk and ambiguity," Journal of Economic Theory, Elsevier, vol. 147(5), pages 2028-2039.
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    Cited by:

    1. Jeleva, Meglena & Tallon, Jean-Marc, 2016. "Ambiguïté, comportements et marchés financiers," L'Actualité Economique, Société Canadienne de Science Economique, vol. 92(1-2), pages 351-383, Mars-Juin.
    2. repec:eee:jetheo:v:172:y:2017:i:c:p:512-557 is not listed on IDEAS
    3. Eisei Ohtaki & Hiroyuki Ozaki, 2015. "Monetary equilibria and Knightian uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(3), pages 435-459, August.
    4. Eisei Ohtaki & Hiroyuki Ozaki, "undated". "Optimality in a Stochastic OLG Model with Ambiguity," Working Papers e69, Tokyo Center for Economic Research.
    5. repec:esx:essedp:720 is not listed on IDEAS
    6. Eisei Ohtaki, "undated". "Optimality of the Friedman rule under ambiguity," Working Papers e103, Tokyo Center for Economic Research.

    More about this item


    Ambiguity aversion; asset pricing; indeterminacy; excess volatility; general equilibrium;

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates


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