A Two-Person Dynamic Equilibrium Under Ambiguity

Posted: 27 Oct 2004

See all articles by Larry G. Epstein

Larry G. Epstein

University of Rochester - Department of Economics

Jianjun Miao

Boston University - Department of Economics

Abstract

This paper describes a pure-exchange, continuous-time economy with two heterogeneous agents and complete markets. A novel feature of the economy is that agents perceive some security returns as ambiguous in the sense often attributed to Frank Knight. The equilibrium is described completely in closed-form. In particular, closed-form solutions are obtained for the equilibrium processes describing individual consumption, the interest rate, the market price of uncertainty, security prices and trading strategies. After identifying agents as countries, the model is applied to address the consumption home-bias and equity home-bias puzzles.

Suggested Citation

Epstein, Larry and Miao, Jianjun, A Two-Person Dynamic Equilibrium Under Ambiguity. Journal of Economic Dynamics and Control, Vol. 27, pp. 1253-1288, 2003. Available at SSRN: https://ssrn.com/abstract=609642

Larry Epstein (Contact Author)

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627-0158
United States
585-275-4320 (Phone)

Jianjun Miao

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-6675 (Phone)

HOME PAGE: http://people.bu.edu/miaoj

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
727
PlumX Metrics