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Futures market equilibrium under Knightian uncertainty
Author(s) -
Lien Donald,
Wang Yaqin
Publication year - 2003
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10081
Subject(s) - knightian uncertainty , economics , futures contract , commodity , risk aversion (psychology) , financial economics , microeconomics , expected utility hypothesis , philosophy , ambiguity , market economy , linguistics
This paper examines the effects of Knightian uncertainty on a commodity futures market within theNewbery‐Stiglitz framework. It is shown that Knightian traders act more conservatively. In a partialtrade equilibrium, risk aversion and Knightian uncertainty have qualitatively similar effects on the equilibriumprice and the equilibrium trading volume. Full‐trade and no‐trade equilibria are likely to prevailwhen the producer and the speculator incur different Knightian uncertainty. Herein different impacts of riskaversion and Knightian uncertainty are observed. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark23:701–718, 2003