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Analyzing Equilibrium in Incomplete Markets with Model Uncertainty
Author(s) -
Yoshikawa Daisuke
Publication year - 2017
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12119
Subject(s) - incomplete markets , economics , risk aversion (psychology) , expected utility hypothesis , microeconomics , econometrics , complete market , mathematical economics
In this paper, we analyze equilibrium in incomplete markets of random endowments by adopting utility indifference pricing and utility‐based pricing. Addressing model uncertainty, we also consider agents who adopt maxmin expected utility and a risk management policy. Using this framework, we demonstrate the existence of equilibrium. Moreover, we clarify the differences in the features of equilibria derived using these methods. Further, we show that the traded amount of random endowments in equilibrium by indifference pricing depends on the degree of risk aversion, initial capital, and agents' risk limits.

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