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ARROW–DEBREU EQUILIBRIA FOR RANK‐DEPENDENT UTILITIES
Author(s) -
Xia Jianming,
Zhou Xun Yu
Publication year - 2016
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/mafi.12070
Subject(s) - economics , weighting , econometrics , equity premium puzzle , consumption (sociology) , mathematical economics , equity (law) , exchange economy , asset (computer security) , capital asset pricing model , microeconomics , medicine , social science , computer security , sociology , political science , computer science , law , radiology
We provide conditions on a one‐period‐two‐date pure exchange economy with rank‐dependent utility agents under which Arrow–Debreu equilibria exist. When such an equilibrium exists, we show that the state‐price density is a weighted marginal rate of intertemporal substitution of a representative agent, where the weight depends on the differential of the probability weighting function. Based on the result, we find that asset prices depend upon agents' subjective beliefs regarding overall consumption growth, and we offer a direction for possible resolution of the equity premium puzzle.