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Asset pricing in a Lucas "fruit-tree' economy with non-additive beliefs

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  • Alexander Zimper

Abstract

We study a Lucas (1978) "fruit-tree" economy under the assumption that agents are Choquet expected utility (CEU) rather than standard expected utility (EU) decision makers. The agents’ non-additive beliefs about the economy’s stochastic dividend payment process may thus express ambiguity attitudes and accommodate violations of Savage’s sure-thing principle as elicited by Ellsberg (1961). As our main formal result we establish the existence of a unique stationary equilibrium price function for the assets in this economy. In order to account for the dynamic inconsistency of CEU decision makers, we thereby use an equilibrium concept that combines the market clearing condition of general equilibrium theory with Bayesian Nash equilibrium. A simple example about the equity premium in our economy with non-additive beliefs illustrates our formal findings.

Suggested Citation

  • Alexander Zimper, 2008. "Asset pricing in a Lucas "fruit-tree' economy with non-additive beliefs," Working Papers 92, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:92
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    File URL: http://www.econrsa.org/node/116
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    More about this item

    Keywords

    Non-additive Probability Measures; Choquet Expected Utility The- ory; Dynamic Inconsistency; Asset Pricing; Equity Premium Puzzle;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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