Subjective Beliefs and Ex Ante Trade
25 Pages Posted: 22 Sep 2013
Date Written: September 1, 2008
Abstract
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.
Keywords: Common prior, absence of trade, ambiguity aversion, general equilibrium
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
A Smooth Model of Decision Making Under Ambiguity
By Peter Klibanoff, Massimo Marinacci, ...
-
Model Misspecification and Under-Diversification
By Tan Wang and Raman Uppal
-
Model Misspecification and Under-Diversification
By Tan Wang and Raman Uppal
-
By Larry G. Epstein and Martin Schneider
-
Model Uncertainty, Limited Market Participation and Asset Prices
By H. Henry Cao, Harold H. Zhang, ...
-
Ambiguity, Learning, and Asset Returns
By Nengjiu Ju and Jianjun Miao
-
Learning and Asset Prices Under Ambiguous Information
By Paolo Vanini, Markus Leippold, ...
-
By David Easley and Maureen O'hara
-
By Larry G. Epstein and Martin Schneider