Analyzing Equilibrium in Incomplete Markets with Model Uncertainty

28 Pages Posted: 3 Jun 2017

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Date Written: June 2017

Abstract

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.

Suggested Citation

Yoshikawa, Daisuke, Analyzing Equilibrium in Incomplete Markets with Model Uncertainty (June 2017). International Review of Finance, Vol. 17, Issue 2, pp. 235-262, 2017. Available at SSRN: https://ssrn.com/abstract=2979693 or http://dx.doi.org/10.1111/irfi.12119

Daisuke Yoshikawa (Contact Author)

Hokkai-Gakuen University ( email )

4-1-40, Asahi-machi, Toyohira-ku
Sapporo-shi
Hokkai-do, 062-8605
Japan

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