devaluation and the j curve some evidence from ldcs within the international trade literature it is not uncommon to find arguments about whether devaluation will improve the trade balance it is argued that the flows of goods respond only with time lags to changes in the exchange rate the j curve terrn is used to describe the movement over time of the trade balance it may deteriorate at first and improvement may come later this paper presents a method by which one could detect the existence of the j curve the method is applied to four developing countries the empirical evidence supports the pattern of movemnent described by the j curve a major policy option for a country facing a persistent balance of payments deficit is said to be devaluation of its currency within the international trade literature it is not uncommon to find arguments about whether devaluation will improve the trade balance or the balance of payments for example proponents of the elasticities approach describe the necessary and sufficient conditions for an improvement in the trade balance in terms of elasticities of demand and supply referred to as the marshall lerner condition while there is abundant empirical evidence to suggest that these conditions are indeed met at least for industrial countries there have been circumstances under which 2 devaluation has not been successful for example one might wonder why the u s trade balance deteriorated so much in 1972 despite the devaluation of the dollar in 1971 this unfavorable effect of devaluation on the trade balance is termed the j curve phenomenon received for publication august 23 1984 revision accepted for publication november 26 1984 the university of wisconsin milwaukee i would like to thank two anonymous referees for their valuable comments on the initial draft of this paper 1 proponents of the absorption approach e g alexander 1952 describe how devaluation may change the terms of trade increase production and switch expenditures from foreign to domestic goods thus improving the trade balance international monetarists argue that devaluation reduces the real value of cash balances and or changes the relative price of traded and nontraded goods thus improving both the trade balance and the balance of payments 2 for an cstimate of the elasticities see houthakker and magee 1969 and warner and kreinin 1983 the former study provides the elasticities estimates under fixed exchange rates and the latter under floating rates this content downloaded from 157 55 39 17 on wed 31 aug 2016 04 39 37 utc all use subject to http about jstor org terms

speculation under unawareness no trade theorems establish that in various trading environments investors who share a common prior will not engage in speculation as long as expected utility bayesian updating and full awareness are imposed we relax the last assumption by allowing for asymmetric unawareness and examine under which conditions speculative behaviour emerges we find that if common knowledge is assumed as in the settings of aumann 1976 and milgrom and stokey 1982 unawareness cannot generate speculation this is not true however in settings where no common knowledge is assumed such as speculation in equilibrium geanakoplos 1989 and betting that is always beneficial morris 1994 unless stronger conditions on awareness are imposed

overlapping expectations and hart s conditions for equilibrium in a securities model hart j econ theory 9 1974 293 311 gave conditions for equilibrium to exist in a securities model where each agent undertakes asset transactions to maximize expected utility of wealth these conditions rule out agents wanting to undertake unbounded balanced transactions to reach a pareto superior allocation given their expectations with mild extra assumptions to make agents unwilling to risk incurring unbounded losses on their portfolios hart s conditions become equivalent to an assumption of overlapping expectations which is comparable to a much weaker form of green s common expectations econometrica 41 1973 1103 1124

a necessary and sufficient condition for the compactness of individually rational and feasible outcomes and the existence of an equilibrium abstract in an economy with arbitrary closed and convex consumption sets we show that page s journal of economic theory 1987 41 392 404 condition of no unbounded arbitrage is necessary and sufficient for compactness of the set of individually rational and feasible allocations in strictly reconcilable economies in which at most one agent may have half lines in his indifference surfaces we show that page s condition is necessary and sufficient for compactness of the set of individually rational utility possibilities for the existence of an equilibrium for non emptiness of the core and for the existence of a pareto optimal allocation these results allow one agent to be risk neutral not permitted by werner s econometrica 1987 55 1403 1418 assumption of no half lines in indifference surfaces our proofs that no unbounded arbitrage is necessary and sufficient for the existence of an equilibrium and for a pareto optimal allocation both rely on the result that non emptiness of the core implies no unbounded arbitrage

money supply announcements and interest rates another view in this paper i use a new approach to analyze the impact of money supply announcements on the bond market before 1980 the only available work on this subject consisted of a few unpublished papers by conrad 1978 sivesind 1978 and urich 1979 1 more recently published papers by grossman 1981 and urich and wachtel 1981 have appeared roley 1982 extends the grossman study to incorporate data after the federal reserve policy statement of october 6 1979 both grossman and urich and wachtel are primarily concerned with the question of money market efficiency using survey data made available by money market services of san francisco and data on treasury bill yields each finds that the market responds quickly to unanticipated changes in the money supply but that anticipated changes have no effect on interest rates in addition grossman finds that when he adds other variables such as past changes in the money

uncertainty and risk in financial markets this paper considers a general equilibrium model in which the distinction between uncertainty and risk is formalized by assuming agents have incomplete preferences over statecontingent consumption bundles as in bewley 1986 without completeness individual decision making depends on a set of probability distributions over the state space a bundle is preferred to another if and only if it has larger expected utility for all probabilities in this set when preferences are complete this set is a singleton and the model reduces to standard expected utility in this setting we characterize pareto optima and equilibria and show that the presence of uncertainty generates robust indeterminacies in equilibrium prices and allocations for any specification of initial endowments we derive comparative statics results linking the degree of uncertainty with changes in equilibria despite the presence of robust indeterminacies we show that equilibrium prices and allocations vary continuously with underlying fundamentals equilibria in a standard risk economy are thus robust to adding small degrees of uncertainty finally we give conditions under which some assets are not traded due to uncertainty aversion

linkages among energy price exchange rates and stock markets evidence from emerging african economies this study examines the dynamic links among oil prices foreign exchange rates and stock markets in emerging africa using recent 10 years data and var bekk garch forecasting framework we find evid

arbitrage and the flattening effect of large numbers abstract in a model of an exchange economy with a continuum of individuals we show that competitive equilibrium can be regarded as resulting from the elimination of arbitrage opportunities generically the elimination of such opportunities results in a phenomenon we call the flattening effect of large numbers the flattening effect provides a precise meaning to the statement that under perfect competition individuals cannot influence prices they face perfectly elastic demands and supplies the attractive geometry associated with arbitrage and the flattening effect is highlighted in several figures we also link the demonstration of equilibrium through arbitrage with the logic of marginalism journal of economic literature classification number d51

asset market equilibrium with short selling this paper presents simple conditions and a simple proof of the existence of equilibrium in asset markets where short selling is allowed and satiation is possible unlike standard non satiation assumptions the one used here is weak enough to be reasonable in the mean variance capital asset pricing model and in asset market models where investors maximize expected utility and where total returns to individual assets may be negative this paper analyses the existence of equilibrium in exchange economy models where choice sets may be unbounded below and satiation is likely there are two main examples of such models one is an asset market model where investors maximize expected utility and the total return to individual assets may be negative with positive probability the other is the mean variance capital asset pricing model capm where investors do not necessarily maximize expected utility but instead maximize a function of only the mean and variance of return to their portfolios in both of these models the investors choice sets will be unbounded if short selling is allowed to short sell a share of an asset means to borrow it and sell it promising to buy it back and return it to the lender at a later date formally short selling corresponds to holding a negative number of shares if unlimited short selling is allowed then there is no limit to how large negative numbers of shares can be held and therefore the choice sets are unbounded satiation can also occur both in the mean variance model and in the expected utility model unless there is a riskless asset in the expected utility model there may be satiation if the individual assets have negative returns with positive probability as the investor gets more and more shares the potential positive returns get larger and larger but so do the potential negative returns if the investor is very averse to large negative returns then he may eventually be satiated and not want any more shares in the mean variance model the expected return to an investor s portfolio increases as he holds more and more shares of the assets but so does the variance of return it may be that at some point the additional expected return gained from adding more shares to the portfolio is not sufficient to compensate for the increase in variance if so then there will be satiation satiation in the mean variance model iie analysed in nielsen 1987 1988 the expected utility model with short selling has been used in many specific analyses of portfolio selection and asset pricing to name but one connor 1984 studies arbitrage pricing in a general equilibrium model where there are no short sales restrictions the mean variance capm is of course very prominent in the finance literature because the

relaxing the sure solvency conditions in temporary equilibrium models abstract the usual temporary equilibrium results hold when sure solvency conditions are appropriately relaxed preferences over potentially bankrupt states are represented by an extension of the indirect utility function for negative wealth for models without institutional constraints such as margin requirements sure solvency can be replaced by unbounded aversion to bankruptcy for models with institutional constraints sure solvency can be replaced by a weaker limit on maximum loss or expected loss

learning and capacity expansion under demand uncertainty a competitive dynamic model of entry into a new industry is set up and both its positive and normative aspects are studied the main assumptions are that entry is sequential that it occurs under imperfect information on the size of the market and that better information becomes available as time goes on the gradual improvement in information is due to the fact that later waves of entrants are able to observe the profitability of earlier entrants the major results reported here under suitable restrictions are that the equilibrium rate of entry is monotonically decreasing over time and that at any given point in time it is smaller than the socially optimal one when a new market opens as a result of a product being newly invented for instance or when an existing market starts to expand uncertainty with respect to its size is likely to prevail as a result of this uncertainty entry of firms into such markets typically will occur in waves some firms will enter initially while others will wait to see the consequences of that initial entry if the experience of early entrants is favourable entry will continue otherwise entry will cease hence with the introduction of a new product two phases are associated the growth phase typified by positive operating profits for existing firms and expansion of productive capacity due to entry of new firms and the mature phase typified by erosion of profits and fixed total productive capacity empiricists estimating the time pattern of investments during the growth phase have found an s shaped diffusion curve see mansfield 1986 and gort and klepper 1982 the purpose of the present paper is to theoretically characterize these time patterns and to investigate their welfare properties any attempt to model the type of entry described above must account for differences in both entry dates and resultant earnings in other words the theory must explain why the realized earnings of different cohorts of firms are not equal often such ex post differences are reconciled by assuming heterogeneity with respect to some latent underlying characteristic managerial ability for instance and attributing differences in earnings to differences in that characteristic in this paper instead earning differentials are attributable to luck only ex ante all firms are technologically identical and equally capable of forecasting market prospects and rationally acting upon those forecasts ex post some firms turn out to have entered at the right time and are for that reason more profitable the model developed in this paper analyzes a parametric example of a sequential entry problem in which the uncertainty over market size is gradually resolved over time in a bayesian setting in an environment of perfect competition and constant returns toscale a free entry equilibrium concept is introduced and the aggregate implications of the time path of investments are derived i then compare this actual time path to the optimum this comparison is interesting because the equilibrium is analysed under the

knightian uncertainty and moral hazard abstract this paper presents a principal agent model in which the agent has imprecise beliefs we model this situation formally by assuming the agent s preferences are incomplete as in bewley 1986 2 in this setting incentives must be robust to knightian uncertainty we study the implications of robustness for the form of the resulting optimal contracts we give conditions under which there is a unique optimal contract and show that it must have a simple flat payment plus bonus structure that is output levels are divided into two sets and the optimal contract pays the same wage for all output levels in each set we derive this result for the case in which the agent s utility function is linear and then show it also holds if this utility function has some limited curvature

financial complexity and trade what are the implications on trading activity if investors are not sophisticated enough to understand and evaluate trades that have a complex payoff structure can frictions generated by this type of financial complexity be so severe that they lead to a complete market freeze like that of the recent financial crisis starting from an allocation that is not pareto optimal we find that whether complexity impedes trade depends on how investors perceive risk and uncertainty for smooth convex preferences such as subjective expected utility complexity cannot halt trade even in the extreme case where each investor is so unsophisticated that he can only trade up to one arrow debreu security without being able to combine two or more in order to construct a complex trade however for non smooth preferences which allow for kinked indifference curves such as maxmin expected utility complexity can completely shut down trade

strategic information manipulation in duopolies abstract this paper studies a duopoly market in which firms can draw inferences concerning uncertain market demand from observations of their outputs and market price firms may adjust their outputs away from myopically optimal levels to affect the informativeness of the market price because firms quantities are observed firms can manipulate the extent to which belief revision occurs rather than the direction in which beliefs are revised as in signal jamming models we develop conditions and present examples under which the value of information is positive and negative and under which firms will increase or decrease quantity to manipulate information journal of economic literature classification numbers d80 l13

first order and second order ambiguity aversion different models of uncertainty aversion imply strikingly different economic behavior the key to understanding these differences lies in the dichotomy between first order and second order ambiguity aversion which i define here my definition and its characterization are independent of specific representations of decisions under uncertainty i show that with second order ambiguity aversion a positive exposure to ambiguity is optimal if and only if there is a subjective belief such that the act s expected outcome is positive with first order ambiguity aversion zero exposure to ambiguity can be optimal examples in finance insurance and contracting demonstrate the economic relevance of this dichotomy this paper was accepted by han bleichrodt decision analysis

pareto optima and equilibria when preferences are incompletely known an exchange economy in which agents have convex incomplete preferences defined by families of concave utility functions is considered sufficient conditions for the set of efficient allocations and equilibria to coincide with the set of efficient allocations and equilibria that result when each agent has a utility in her family are provided welfare theorems in an incomplete preferences framework therefore hold under these conditions and efficient allocations and equilibria are characterized by first order conditions

intertemporal equilibria with knightian uncertainty we study a dynamic and infinite dimensional model with incomplete multiple prior preferences in interior efficient allocations agents share a common risk adjusted prior and subjective interest rate interior efficient allocations and equilibria coincide with those of economies with subjective expected utility and priors from the agents multiple prior sets a specific model with neither risk nor uncertainty at the aggregate level is considered risk is always fully insured for small levels of ambiguity there exists an equilibrium with inertia where agents also insure fully against knightian uncertainty when the level of ambiguity exceeds a critical threshold full insurance no longer prevails and there exist equilibria with inertia where agents do not insure against uncertainty at all we also show that equilibria with inertia are indeterminate

the reaction of stock prices to unanticipated changes in money a note much of the past work on the money stock market relationship centered on the question of whether money is a leading indicator of stock prices studies by sprinkel 22 homa and jaffee 10 and hamburger and kochin 8 supported the view that past increases in money lead to increases in equity prices the implication of this work was that investors could earn above normal proflts by using a trading strategy based on the observed behavior of the money stock this contradicts the efficient markets hypothesis which asserts that current asset prices reflect all available information so that no such trading strategy can exist subsequent research by cooper 3 pesando 17 rozeff 21 and rogalski and vinso 19 has shown that past money changes do not contain predictive information on stock prices upholding the efficient markets view this paper investigates whether the response of common stock prices to weekly money announcements is consistent with the efflcient markets hypothesis unlike the above research therefore the focus is on the very short run response of stock prices to both anticipated and unanticipated announced changes in money recent work by berkman 1 grossman 7 urich and wachtel 25 and roley 20 indicates that short term interest rates respond only to the unexpected component of the announcement with short term rates rising when the announced change in money exceeds the expected change berkman also examined the reaction of stock prices finding that an unanticipated increase in the money supply depressed share prices lynge 13 found that positive money announcements lowered stock prices but since he did not distinguish expected from unexpected money growth his results do not bear directly on the efficient markets issue in investigating the response of stock prices to weekly money announcements survey data on market participants forecasts of the announced weekly change

interim efficient allocations under uncertainty abstract this paper considers an exchange economy under uncertainty with asymmetric information uncertainty is represented by multiple priors and posteriors of agents who have either bewley s incomplete preferences or gilboa schmeidler s maximin expected utility preferences the main results characterize interim efficient allocations under uncertainty that is they provide conditions on the sets of posteriors thus implicitly on the way how agents update the sets of priors for non existence of a trade which makes all agents better off at any realization of private information for agents with the incomplete preferences the condition is necessary and sufficient but for agents with the maximin expected utility preferences the condition is sufficient only a couple of necessary conditions for the latter case are provided

stock prices and economic news this paper examines the daily response of stock prices to announcements about the money supply inflation real economic activity and the discountrate except for the discount rate survey data on market participants expectations of these announcements are used to identify the unexpected component of the announcements in order to test the efficient markets hypothesis that only the unexpected part of any announcement the surprise moves stock prices the empirical results support this hypothesis and indicate further that surprises related to monetary policy significantly affect stock prices there is only limited evidence of an impact from inflation surprises and no evidence of an impact from real activity surprises on the announcement days there is also only weak evidence of stock price responses to surprises beyond the announcement day this abstract was borrowed from another version of this item

dynamic linkages between asian stock prices and exchange rates new evidence from causality in quantiles this article applies the granger causality test in quantiles to investigate causal relations between stock returns and exchange rate changes for nine asian markets over the period 1 january 1997 to 16 august 2010 our empirical results indicate that the quantile causal relations vary across different quantiles and different periods although the causal effects of exchange rate changes on stock returns or stock returns on exchange rate changes are heterogeneous across quantiles the overall evidence suggests that most stock and foreign exchange markets are negatively correlated the result shows that there are more bidirectional causal relations in accordance with this method than the conventional least square ls estimation the symmetry of these quantile causal effects the averaging effect helps to explain why conventional ls method usually obtains an insignificant result of causality

growth under uncertainty with experimentation abstract we introduce bayesian learning into a stochastic growth model and study the effect of experimentation on the optimal level of the investment decision and on the amount of information gathering when more investment produces more information experimentation can push towards a lower level of investment thus reducing information acquisition symmetrically when more investment reduces information experimentation can increase investment and again decrease information gathering these results run contrary to intuitions generated by the standard literature on experimentation

the value of information in efficient risk sharing arrangements suppose that agents share risks in competitive markets we show that better information makes everyone worse off if the economy has a representative agent that is the economy s demand for state contingent consumption equals the demand of a hypothetical agent who owns all the economy s wealth the representative agent moreover is normatively unrepresentative although each agent dislikes information the representative agent is indifferent although we emphasize pure exchange our results imply that a representative agent model might seriously misstate the welfare effects of improved information in an economy with production and risk sharing even if it performs well otherwise

bayesian economist bayesian agents i an alternative approach to optimal learning we generalize the results on bayesian learning based on the martingale convergence theorem to the sequential framework we show that the variability in the sequential framework is sufficient under mild conditions to circumvent the incomplete learning results that characterize the optimal learning literature we then give an alternative approach whereby the economist is bayesian with a prior on the space of agent priors we illustrate the usefulness of our approach by applying it to two popular economic examples a monopolist who does not know the demand curve he faces and the stochastic single sector growth model with an unknown production function

structural uncertainty and subsidy removal for economies in transition abstract economies in transition are faced with a high degree of structural uncertainty i e uncertainty about which it is possible to learn through experience we study structural uncertainty s effects on a subsidy removal program subsidy removal causes unemployment but yields fiscal benefits and facilitates private sector growth when the policymaker does not know the speed with which the private sector absorbs the unemployed he will be driven toward a more decisive and therefore more informative policy the model also rationalizes policy reversals and implies that irreversibility constraints and political instability dampen the learning effect making policy more gradualist

sectoral shocks learning and aggregate fluctuations we present a model in which sectoral shocks have aggregate consequences the model relies on irreversible investment and imperfect information to slow the adjustment of expanding industries we show that this gradual expansion is sub optimal

arbitrage and the existence of competitive equilibrium a general equilibrium model of markets for commodities and assets is considered the author develops the notion of a price system that admits no arbitrage opportunity and demonstrates the fundamenta l role of this concept for the theory of the existence of a competiti ve equilibrium a price system admits no arbitrage opportunity for a consumer if every bundle of desired commodities has a positive market value the author proves that the existence of a price system that a dmits no arbitrage opportunity for all consumers is sufficient for th e existence of an equilibrium copyright 1987 by the econometric society

sharing risk and ambiguity we study the market implications of ambiguity in common models we show that generic determinacy is a robust feature in general equilibrium models that allow a distinction between ambiguity and risk

autoregressive modelling and money income causality detection abstract a step wise procedure based on granger s concept of causality and abaike s final prediction error criterion is suggested as a practical means to identify the order of lags of each variable in a multivariate autoregressive process the model seems useful because it can serve as a reduced form formulation to avoid imposing often spurious or false restrictions of the model it also provides a reasonably powerful test of causality the idea is applied to u s postwar money and income data it is found that between m1 and gnp a bivariate feedback model fits the data best between m2 and gnp a one way causal model from money to income performs better diagnostic checks applied to our model seem to indicate the adequacy of our approach

structural breaks dynamic correlations and hedge and safe havens for stock and foreign exchange markets in greater china this study investigates the dynamic relationship and hedging strategy between stock and foreign exchange markets in greater china for the period 22 july 2005 to 30 november 2015 using the dcc garch model with and without structural breaks the results provide strong evidence of negative time varying correlations between these two markets in greater china consistent with the stock oriented models of exchange rates moreover adding structural breaks reduces the degree of volatility persistence for all considered markets and can provide more accurate hedge and safe haven properties of the us dollar against greater china stock markets the findings have several important implications for portfolio risk managers international investors and policymakers

overlapping risk adjusted sets of priors and the existence of efficient allocations and equilibria with short selling the theory of existence of equilibrium with short selling is reconsidered under risk and ambiguity modelled by risk averse variational preferences no arbitrage conditions are given in terms of risk adjusted priors a sufficient condition for existence of efficient allocations is the overlapping of the interiors of the risk adjusted sets of priors or the inexistence of mutually compatible trades with non negative expectation with respect to any risk adjusted prior these conditions are necessary when agents are not risk neutral at extreme levels of wealths it is shown that the more uncertainty averse or risk averse the agents the more likely are efficient allocations and equilibria to exist

stock prices and the effective exchange rate of the dollar the literature on the relation between stock prices and exchange rates is very poor and includes few studies that have argued that exchange rate changes do effect stock prices by relying on the portfolio approach to exchange rate determination it is argued that a change in stock prices could also have an impact on exchange rates i e there could be a two way relationship between exchange rates and stock prices granger concept of causality as well as cointegration technique are employed to support this conjecture the empirical results show that there is bidirectional causality between stock prices measured by s p 500 index and the effective exchange rate of the dollar at least in the short run the cointegration analysis reveals that there is no long run relationship between two variables

uncertainty risk neutral measures and security price booms and crashes abstract this paper provides a general analysis of intertemporal utility based on the multiple priors model of aversion to knightian uncertainty then the existence of equilibrium is proven for a representative agent security market model it is shown that uncertainty aversion can invalidate the existence of a risk neutral measure representation for prices in addition an example suggests an intriguing link between uncertainty aversion and the possibility of abrupt changes in security prices the analysis relies heavily on a fubini type theorem for analytic functions due to dellacherie and meyer probabilities and potential c north holland new york 1988 journal of economic literature classification numbers g12 d81 d90

market response to the weekly money supply announcements in the 1970s the hypothesis that the weekly announcement of the money supply affects interest rates is examined the announcement effect is interpreted as a policy anticipation effect that is an unanticipated increase in the money supply leads to an increase in interest rates in anticipation of future tightening by the federal reserve estimates of this effect with proxies for the unanticipated change constructed from a survey of money supply forecasts and an arima model indicate that a financial markets respond very quickly to the announcement and b the response was largest when policymakers emphasized the importance of the monetary aggregates financial market participants are careful observers of the weekly money supply announcement and generally agree that the announcement often leads to changes in interest rates this occurs because the announcement leads market participants to revise their expectations both of future federal reserve policy actions and of future economic conditions in this paper we examine the response of yields on treasury bills to the announcement of the money supply and the extent to which that response has varied in the last ten years money supply announcements may affect market interest rates in three ways first actual expansion of the money supply leads to lower interest rates through a liquidity effect however rapid monetary growth which is not anticipated leads market participants to expect the federal reserve to counteract such growth in the future as a consequence there may be a policy anticipation effect which causes higher interest rates in anticipation of future tightening furthermore prolonged rapid monetary growth also creates inflation and inflationary expectations which lead to higher interest rates thus there may exist a third effect the inflationary expectations effect which also leads to higher interest rates our interest in this paper is in the immediate market response to the weekly announcement of the money supply which as we argue below is most likely to be a policy anticipation effect the policy anticipation effect is best described by example suppose that the announced change in the money supply exceeds that which was expected by

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

actively learning by pricing a model of an experimenting seller this article presents a model of a rational seller who is actively learning the slope of his demand curve via his pricing strategy consequently this seller optimally experiments with his price resulting price patterns show a tendency for discreteness as observed in the data which has proved to be a major challenge to most price setting models the experimentation motive can also replicate the observation that prices are more volatile than costs as well as the presence of many idiosyncratic price changes in the data it can do so without a need to assume the existence of large idiosyncratic shocks

rational expectations and the impact of money upon stock prices received monetary theory supports the existence of a strong relationship between monetary activity and stock prices following the work of friedman and schwartz 8 relating money supply to aggregate economic activity some researchers have examined the more specific connection between changes in the rate of growth of money supply and associated movements in stock prices see 6 10 11 14 17 18 19 20 22 and 28 these studies use a variety of monetary aggregate measures to functionally relate the level of stock market indices to contemporaneous and lagged monetary growth rates in general the findings indicate a direct relationship between money supply and stock returns

incomplete preferences and equilibrium in contingent markets this paper shows that betting or speculative trading between agents with incomplete preferences is likely to occur if agents have access to convex choice sets this contrasts sharply with endowment economy models where preference incompleteness often hinders betting speculative trading or mutually beneficial insurance arrangements our results imply that decision makers with identical tastes and identical feasible sets will potentially gain from speculative trade for generic status quo allocations we also develop a framework for endogenizing the status quo allocations of decision makers that are treated exogenously in the existing literature finally we provide a tractable differential representation of status quo allocations equilibria and conditions where speculative trade may or may not emerge

temporary acceleration of inflation what can a central bank learn from it in this article i present a model in which the monetary authority conducts policy by setting money supply in the presence of uncertainty and bayesian learning about the economic environment i find that there exists a set of assumptions under which a temporary acceleration of money growth and thus of inflation increases the government s overall expected utility there also exists a set of assumptions under which a temporary deceleration of money growth and thus of inflation increases the govern ment s overall expected utility

asset demands without the independence axiom an important application of the theory of choice under uncertainty is to asset markets and an important property in these markets is a preference for portfolio diversification if an investor is an expected utility maximizer then s he is risk averse if and only if s he exhibits a preference for diversification this paper examines the relationship between risk aversion and portfolio diversification when preferences over probability distributions of wealth do not have an expected utility representation

interim efficiency with meu preferences abstract recently kajii and ui 2009 17 proposed to characterize interim efficient allocations in an exchange economy under asymmetric information when uncertainty is represented by multiple posteriors when agents have bewley s incomplete preferences kajii and ui 2009 17 proposed a necessary and sufficient condition on the set of posteriors however when agents have gilboa schmeidler s maxmin expected utility preferences they only propose a sufficient condition the objective of this paper is to complete kajii and ui s work by proposing a necessary and sufficient condition for interim efficiency for various models of ambiguity aversion and in particular maxmin expected utility our proof is based on a direct application of some results proposed by rigotti shannon and stralecki 2008 24

survival with ambiguity we analyze a market populated by expected utility maximizers and smooth ambiguity averse consumers we study conditions under which ambiguity averse consumers survive and affect prices in the limit if ambiguity vanishes with time or if the economy exhibits no aggregate risk ambiguity averse consumers survive but have no long run impact on prices in both scenarios ambiguity averse consumers are fully insured against ambiguity in equilibrium and thus behave as expected utility maximizers with correct beliefs if ambiguity averse consumers are not fully insured against ambiguity their behavior mimics expected utility maximizers with wrong beliefs and a stochastic discount factor which might be consistently higher or lower than their actual discount factor we use this insight to analyze a markov economy with large persistent ambiguity consumers with decreasing absolute ambiguity aversion whose prudence with respect to ambiguity exceeds twice their absolute ambiguity aversion a s survive in the presence of expected utility maximizers with correct beliefs if the economy further exhibits aggregate risk they drive the expected utility maximizers out of the market and determine prices in the limit in contrast consumers with increasing or constant absolute ambiguity aversion only survive in the absence of aggregate risk and have no impact on limit prices

a more robust definition of subjective probability the goal of choice theoretic derivations of subjective probability is to separate a decisionmaker s underlying beliefs subjective probabilities of events from their preferences attitudes toward risk classical derivations have all relied upon some form of the marschak samuelson independence axiom or the savage sure thing principle which imply that preferences over lotteries conform to the expected utility hypothesis this paper presents a choice theoretic derivation of subjective probability in a savage type setting of purely subjective uncertainty which neither assumes nor implies that the decisionmaker s preferences over lotteries necessarily conform to the expected utility hypothesis copyright 1992 by the econometric society

investment as a process of search this paper analyzes optimal capital accumulation in the face of structural uncertainty in which the firm does not fully know its own profit function and can discover it only through further investment it is shown that under structural uncertainty capital accumulation is gradual even when adjustment costs are linear and not convex it is further shown that structural uncertainty creates an incentive to market research the paper also presents an example of structural uncertainty in which an additional price uncertainty has a negative effect on investment contrary to the standard models

investment under uncertainty irreversibility and the arrival of information over time in this paper we consider a risk neutral competitive firm which is uncertain about the true state of demand we build upon arrow by demonstrating that the irreversibility of investment in physical capital together with the anticipation of receiving information and of learning the state of demand lead to 1 cautious investment behaviour and hence to lower investment levels than otherwise since the firm cannot disinvest if market conditions turn out to be less favourable than currently anticipated 2 a time varying risk premium or marginal adjustment cost which is shown to arise endogenously and to be positively related to the investment level and to the anticipation of greater information in the sense of blackwell 1951 1953 3 a gradual adjustment of the capital stock to the desired level defined as the optimal capital stock corresponding to the true state of demand

experimentation with accumulation abstract we study signal dependent experimentation in the presence of accumulation and show that the passive learner s action surprisingly coincides with the experimentor s when the unknown term is the one determining the decay rate of the stock while they differ when the parameter being learned is the one measuring the accumulation rate these results highlight the importance of the dynamic structure of the problem in signal dependent experimentation moreover they have important consequences for the pollution accumulation debate currently in progress

the adjustment of stock prices to information about inflation this paper analyzes the reaction of stock prices to the new information about inflation based on daily returns to the standard and poor s composite portfolio from 1953 78 it seems that the stock market reacts negatively to the announcement of unexpected inflation in the consumer price index c p i although the magnitude of the reaction is small it is interesting to note that the stock market seems to react at the time of announcement of the c p i approximately one month after the price data are collected by the bureau of labor statistics

uncertainty efficiency and incentive compatibility ambiguity solves the conflict between efficiency and incentive compatibility abstract a fundamental result of modern economics is the conflict between efficiency and incentive compatibility that is the fact that some pareto optimal efficient allocations are not incentive compatible this conflict has generated a huge literature which almost always assumes that individuals are expected utility maximizers what happens if they have other kind of preferences is there any preference where this conflict does not exist can we characterize those preferences we show that in an economy where individuals have complete transitive continuous and monotonic preferences every efficient allocation is incentive compatible if and only if individuals have maximin preferences

diversification and equilibrium in securities markets abstract diversification is the strategy of investing small fractions of wealth in each of a large number of securities and thereby reducing risk the basic argument in support of diversification is an appeal to the law of large numbers a portfolio in which an investor s wealth is invested in equal fractions in each ofnsecurities with i i d returns has a return that converges to a riskless return asnincreases indefinitely any risk averse investor would prefer the limit riskless return to the return of any portfolio in this paper we use the space ba of all finitely additive signed measures on the set of natural numbers the index set for securities to model the set of portfolios from which an investor may choose this portfolio space contains arbitrary finite portfolios and a nontrivial portfolio which is the limit of the sequence of portfolios having the fraction of wealth 1 ninvested in each ofnsecurities we identify a class of portfolios which we call perfectly diversified these portfolios are described by purely finite additive measures in a perfectly diversified portfolio wealth invested in each individual security is a negligible fraction of the total wealth of the portfolio we show that the return of every perfectly diversified portfolio of securities with uncorrelated returns is riskless it is shown that modeling of the portfolio space as the space ba makes possible a rigorous derivation of a general equilibrium version of the arbitrage pricing theorem apt the apt provides a good illustration of the implications of diversification for equilibrium prices of securities journal of economic literatureclassification numbers d52 g20

on equilibrium in hart s securities exchange model in this paper we use a no unbounded arbitrage condition to give a very direct proof of the existence of equilibrium in hart s unbounded securities exchange model j econ theory 9 1974 293 311 we also examine the relationship between the no unbounded arbitrage condition and the sufficiency conditions of hart ibid and hammond j econ theory 31 1983 170 175 we present an example to show that if traders are not sufficiently risk averse then hammond s overlapping expectations condition is not in general equivalent to the no unbounded arbitrage condition or hart s sufficiency conditions and therefore is not sufficient to guarantee the existence of equilibrium we also present an example to show that it is possible for the no unbounded arbitrage condition to hold without overlapping expectations and therefore it is possible for equilibrium to exist without overlapping expectations

risk sharing in the small and in the large abstract this paper analyzes risk sharing in economies with no aggregate uncertainty when agents have non convex preferences in particular agents need not be globally risk averse or uncertainty averse in the sense of schmeidler 1989 we identify a behavioral condition under which betting is inefficient i e every pareto efficient allocation provides full insurance and conversely if and only if agents supporting probabilities defined as in rigotti et al 2008 have a non empty intersection our condition is consistent with empirical and experimental evidence documenting violations of convexity in either outcomes or utilities our results show that the connection between speculative betting and inconsistent beliefs does not depend upon global notions of risk or ambiguity aversion

decision theory under ambiguity we review recent advances in the field of decision making under uncertainty or ambiguity we start with a presentation of the general approach to a decision problem under uncertainty as well as the standard bayesian treatment and issues with this treatment we present more general approaches choquet expected utility maximin expected utility smooth ambiguity and so forth that have been developed in the literature under the name of models of ambiguity sensitive preferences we draw a distinction between fully subjective models and models incorporating explicitly some information we review definitions and characterizations of ambiguity aversion in these models we mention the challenges posed by some of the models presented we end with a review of part of the experimental literature and applications of these models to economic settings

subjective beliefs and ex ante trade we study a definition of subjective beliefs applicable to preferences that allow for the perception of ambiguity and provide a characterization of such beliefs in terms of market behavior using this definition we derive necessary and sufficient conditions for the efficiency of ex ante trade and show that these conditions follow from the fundamental welfare theorems when aggregate uncertainty is absent our results show that full insurance is efficient if and only if agents share some common subjective beliefs our results hold for a general class of convex preferences which contains many functional forms used in applications involving ambiguity and ambiguity aversion we show how our results can be articulated in the language of these functional forms confirming results existing in the literature generating new results and providing a useful tool for applications

ambiguity aversion in the long run to disagree we must also agree abstract we consider an economy populated by smooth ambiguity averse agents with complete markets of securities contingent to economic scenarios where bankruptcy is permitted but there is a penalty for it we show that if agents posterior belief reductions given by their average probabilistic beliefs do not become homogeneous then an equilibrium does not exist it is worth noting that our main result does not imply any convergence of ambiguity perception or even the attitudes towards it in this way complete markets with default and punishment allow for ambiguity aversion in the long run and the agents can disagree on their ambiguity perception but they must agree on their expected beliefs

a definition of uncertainty aversion a definition of uncertainty or ambiguity aversion is proposed it is argued that the definition is well suited to modelling within the savage as opposed to anscombe and aumann domain of acts the defined property of uncertainty aversion has intuitive empirical content behaves well in specific models of preference multiple priors and choquet expected utility and is tractable tractability is established through use of a novel notion of differentiability for utility functions called eventwise differentiability

when does aggregation reduce risk aversion we study the problem of risk sharing within a household or syndicate a household shares risky prospects using a social welfare functional we characterize the social welfare functionals such that the household is collectively less risk averse than each member and satisfies the pareto principle and an invariance axiom we single out the sum of certainty equivalents as the unique member of this family which is quasiconcave over riskless allocations

on the different notions of arbitrage and existence of equilibrium in this paper we first prove an equilibrium existence theorem for finite dimensional economies with unbounded below consumption sets we only assume that the individually rational utility set is compact and use the demand approach instead of the standard negishi s approach we next compare the different concepts of no arbitrage that have been used in the literature and give conditions for equivalence between absence of arbitrage and existence of equilibrium lastly we introduce the concept of strong unbounded arbitrage and show that the absence of strong unbounded arbitrage implies the compactness of the individually rational utility set journal of economic literature classification numbers c62 d50

financial market structures revealed by pricing rules efficient complete markets are prevalent abstract it is well known that when an arbitrage free financial market is incomplete or has tradable financial assets with frictions there must be multiple risk neutral probability measures the main motivation for the present study is to elucidate what type of market structure usually emerges from pricing rules first we obtain that finitely generated pricing rules characterized by polytopes of probabilities capture the class of all finite arbitrage free financial markets that are potentially incomplete or subject to frictions affecting tradable assets next we provide a novel characterization of efficient securities and introduce related notions of market completeness that underlies pricing rules our main result shows that the class of efficient complete markets with bid ask spreads is the prevalent case revealed by finitely generated pricing rules

efficient allocations under ambiguity abstract important implications of the expected utility hypothesis and risk aversion are that if agents have the same probability belief then consumption plans in every efficient allocation of resources under uncertainty are comonotone with the aggregate endowment and if their beliefs are concordant then the consumption plans are measurable with respect to the aggregate endowment we study these two properties of efficient allocations for models of preferences that exhibit ambiguity aversion using the concept of conditional beliefs which we introduce in this paper we provide characterizations of such conditional beliefs for the standard models of preferences used in applications

temporary equilibrium with storable commodities abstract this paper fills a gap in temporary equilibrium theory by establishing necessary conditions and sufficient conditions for the existence of temporary equilibrium in a sequential economy with spot and incomplete futures markets for storable commodities and with heterogeneous expectations an important realistic feature of the model is an uncertain storage technology overlapping expectations and the usual sufficient conditions guarantee the existence of equilibrium inventory speculation implies a lower bound on current spot prices in terms of futures prices and the storage technology these results extend to an economy in which observed aggregate inventories influence expectations in a well behaved manner

the partnered core of an economy and the partnered competitive equilibrium abstract an allocation is partnered if it admits no asymmetric dependencies between players we introduce the partnered core of an economy and the partnered competitive equilibrium in an economy with unbounded consumption sets and local non satiation we show that no unbounded arbitrage is sufficient for non emptiness of the partnered core with strictly concave utility functions we obtain a second welfare theorem for the partnered competitive equilibrium and show that no unbounded arbitrage is necessary and sufficient for non emptiness of the partnered core and the existence of a partnered competitive equilibrium