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Functional Rational Expectations Equilibria in Market Games


  • Shorish, Jamsheed

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)


The rational expectations equilibrium has been criticized as an equilibrium concept in market game environments. Such an equilibrium may not exist generically, or it may introduce unrealistic assumptions about an economic agent's knowledge or computational ability. We define a rational expectations equilibrium as a probability measure over uncertain states of nature which exploits all available information in a market game, and which exists for almost all economies. Furthermore, if retrading is allowed, it is possible for agents to compute such a 'functional rational expectations equilibrium' using straightforward numerical fixed point algorithms.

Suggested Citation

  • Shorish, Jamsheed, 2006. "Functional Rational Expectations Equilibria in Market Games," Economics Series 186, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:186

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    References listed on IDEAS

    1. James Peck & Matthew O. Jackson, 1999. "Asymmetric information in a competitive market game: Reexamining the implications of rational expectations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 13(3), pages 603-628.
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    13. Kelly, David L. & Shorish, Jamsheed, 2000. "Stability of Functional Rational Expectations Equilibria," Journal of Economic Theory, Elsevier, vol. 95(2), pages 215-250, December.
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    More about this item


    Market game; Rational expectations equilibrium; Bayesian updating; Learning; Computation;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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