General equilibrium, risk taking and volatility
Although it is a phenomenon that is routinely observed in financial markets, the interaction between ambiguity averse and ambiguity lovers was not yet analyzed extensively in the literature of general equilibrium, mainly due to technical issues. In this paper, we show that the wealth aggregate risk plays a role on the existence of equilibrium in Arrow-Debreu economies. Moreover, we study properties of the equilibrium allocations such as condition for risk sharing, and the price behavior in equilibrium in presence of regulation, i.e., state price volatility when regulation is increased, and, for preferences with distorted probabilities with CARA utility functions, the decomposition of risk factor and ambiguity factor in these prices.
|Date of creation:||25 Feb 2014|
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