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Speculative Trade Equilibria with Incorrect Price Anticipations

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  • Alexander Zimper

    () (Department of Economics, University of Pretoria)

Abstract

This paper introduces an equilibrium concept for boundedly rational agents who base their demand-supply decisions on incorrect price anticipations. Formally, we differentiate between equilibrium and out-of-equilibrium states. If the agents attach zero prior probability to all out-of-equilibrium states, our equilibrium concept coincides with Radner's (1979) concept of rational expectations equilibria (=REE). In contrast to REE, however, there may exist strict incentives for speculative asset trade whenever boundedly rational agents regard out-of-equilibrium states as possible.

Suggested Citation

  • Alexander Zimper, 2013. "Speculative Trade Equilibria with Incorrect Price Anticipations," Working Papers 201335, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201335
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    Cited by:

    1. Zimper, Alexander, 2014. "On the impossibility of insider trade in rational expectations equilibria," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 109-118.

    More about this item

    Keywords

    Bounded Rationality; Speculative Trade; Rational Expectations; Incorrect Prices;

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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