Chichilnisky, Graciela (1996): Markets with endogenous uncertainty: theory and policy. Published in: Theory and Decision , Vol. 41, (1996): pp. 99-131.
Download (5MB) | Preview
Classic formulations of markets regard uncertainty as originating from acts of nature. I extend this to a formulation of markets which face risks induces by the economy itself, such as the environmental risks of atmospheric and climate change induced by CFC and CO2 emissions.
I formulate and prove the existence of a general competitive equilibrium where the state space and the probabilities of events are endogenously determines as part of the equilibrium. Traders take optimal positions with respect to the uncertainty which their own actions induce. The equilibrium allocations are efficient in a restricted sense. I show that scientific uncertainty can be fully hedged. However uncertainty induced by the unknown level of output at an equilibrium cannot be hedged fully. I discuss applications for CAT Futures, recently introduced on the Chicago Board of Trade, and to international environmental strategies.
|Item Type:||MPRA Paper|
|Original Title:||Markets with endogenous uncertainty: theory and policy|
|Keywords:||endogenous uncertainty; markets general equilibrium; financial innovation; CAT futures|
|Subjects:||R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R13 - General Equilibrium and Welfare Economic Analysis of Regional Economies
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing
|Depositing User:||Graciela Chichilnisky|
|Date Deposited:||06. May 2008 05:29|
|Last Modified:||18. Feb 2013 12:43|
ARROW, K.J.: 1953, 'The role of securities in the optimal allocation of risk-bearing', in French: Econometric: Proceedings of the Colloque sur les Fondments et Applications de la Theorie du Risque en Econometrie, Centre National de la Recherch Scientifique, Paris. English Translation: Review of Economic Studies (1964) 31: 91-96.
Arrow, K.J., Uncertainty and the Welfare Economics of Medical Care, American Economic Review, Dec 1963, 941-73.
BERGER, MELVYN, S.: 1977, Nonlinearity and Functional Analysis, Lectures on Nonlinear Problems in Mathematical Analysis, Academic Press, New York, San Francisco, London.
CASS, D.G. CHICHILNISKY, AND H-M WU: 1996, 'Individual risks and mutual insurance', Econometric 64(2), 333-342.
CHICHILNISKY, G., (1977), "Spaces of Economic Agents", Journal of Economic Theory, 16 (1), 160-173.
CHICHILNISKY, G: 1992, 'Existence and optimality of a competitive equilibrium with endogenous uncertainty', Working Paper, Columbia University, December 1992.
CHICHILNISKY, G.: 1993, 'Comment: The Taxation of Carbon Emissions in Industrial and Developing Countries', in OECD: The Economies of Climate CHange (ed. T. Jones), Paris, 1994, pp. 159-170.
Chichilnisky, G. (1994) "Social Diversity, Limited Arbitrage and Gains from Trade: A Unified Perspective on Resource Allocation", American Economic Review, pp. 427-34.
Chichilnisky, G. (1992) "Limited Arbitrage is Necessary and Sufficient for the Existence of a Competitive Equilibrium With or Without Short Sales", Economic Theorv 5, January 1995, pp. 79-108.
Chichilnisky, G. (1994) "A Unified Perspective on Resource Allocation: Limited Arbitrage is Necessary and Sufficient for the Existence of a Competitive Equilibrium, the Core and Social Choice", Invited Presentation at the International Economic Association (IEA) Round Table on Social Choice, Schloss Hernstein, Austria, May 25-28, 1994, forthcoming in Social Choice Reexamined, eds. K. Arrow, A. Sen and T. Suzumura, (London: Macmillan).
Chichilnisky, G. (1994b) "Limited Arbitrage is Necessary and Sufficient for the Existence of an Equilibrium and the Core and it Limits Voting Cycles", Economic Letters 46, pp. 321-331.
CHICHILNISKY, G, AND G.M. HEAL: 1993, 'Global Environmental Risks', Journal of Economic Perspectives, 7(4), pp. 65-86.
Chichilnisky, G. and Heal, G. (1993) "Existence of a Competitive Equilibrium in Sobolev Spaces without Bounds in Short Sales", Journal of Economic Theory 59, pp. 364-84.
CHICHILNISKY, G. AND G.M. HEAL: 1992, 'Financial Markets with unknown Risks', Working Paper, Columbia University.
CHICHILNISKY, G. AND H-M WU.: 1991, 'Financial Innovation and Endogenous Default in Incomplete Asset Markets', Stanford Institute for Theoretical Economics Technical Report No. 50, 1992, forthcoming in Information and Uncertainty: New Directions in Economic Theory, Essays in Honor of Kenneth Arrow (ed. G. Chichilnisky), Cambridge University Press.
CHICHILNISKY, G., J. DULTA, G.M. HEAL: 1991, 'Price uncertainty and derivatives securities in general equilibrium', Working Paper, Columbia University, revised 1993.
CHICHILNISKY, G., G.F.HAHN, G.M. HEAL: 1992, 'Price uncertainy and incomplete markets', Working Paper, Columbia Business School.
CHICHILNISKY, G., G.M. HEAL, P. STRUFERT, AND J. SWINKELS: 1992, 'Believing in Multiple Equilibrium', Stanford Institute for Theoretical Economics Technical report No. 49, August 1992, and First Boston Working Paper FB-92-32, Columbia Business School, August 1992.
CHICHILNISKY, G., G.M. HEAL, AND D. TSOMOCOS: 1994, 'Option Values and Endogenous Uncertainty in ESOP's, MBO's and Asset Backed Securities', Working Paper, Columbia Business School, August 1992.
DASGUPTA, P. AND G.M. HEAL: 979, Economic Theory and Exhaustible Resources, Cambridge University Press.
EAVES, B. C. , " Homotopies for computation of fixed points," Mathematical Programming, 3(1).
FUDENBERG, D., B. HOLSTROM AND P. MILGROM: 1990, 'Short-term contracts and long-term agency relationships', Journal of Economic Theory, 51(1), June 1990.
HAHN, F.: 1991, ' remark on incomplete market equilibrium', Working Paper Cambridge University and University of Siena, to appear in Informtaion and Uncertainty: New Directions in Economic Theory, Essays in Honor of Kenneth Arrow (ed. G. Chichilnisky), Cambridge University Press.
HAHN, F.: 1992 'Making General Equilibrium Theory More Plausible', The Second Annual Arrow Lecture Series, Dept. of Econ., Stanford Iniv., May 5 and 6.
HAHN, F.: 1973, The concept of equilibrium in economics, Inaugural Lecture, Cambridge University, Cambridge University Press.
HEAL, G.M.: (1984) 'Interaction of the economy and climate: A framework for policy design under uncertainty' in Smith, Kerry and Ann Dryden White eds. Advances in Applied Macroeconomics, Greenwich, J.A.I. Press, 151-158.
Heal, G. (1992) "Economy and Climate: A preliminary Framework for Microeconomic Analysis" in Just, Richard and Nancy Bockstael, eds, Comodity and NAtural Resource Policies in Agricultural Systems, New York and Oxford: North Holland 1993, 855-880.
KURZ, M.: 1991, 'On the structure and diversity of rational beliefs', Technical Report No. 31, Stanford Institute of Theoretical Economics, Economic Theory, 1994.
KURZ, M.: 1974, 'The Kesten-Stigum Model and the Treatment of Uncertainty in Equilibrium Theory', in M.C. Balch, D. McFadden, and S. Wu, (eds.) Essays in Economic Behavior under Uncertainty, North Holland.
MILNOR, J.: 1965, Topology from a differentiable viewpoint, The University Press of Virginia, Charlottesville.
STIGLITZ, J.: 1974, 'Tax policy and the oil industry', mimeo, Yale University,
STIGLITZ, J.: 1983, 'Risk incentives and insurance: the pure theory of moral hazard', The Geneva Papers, Jan. 1983, 8:26, 4-32.
STEIN, J.: 1992, 'Cobwebs, rational expectations and futures markets', Review of Economics and Statistics, ;XXIV (1), pp. 127-134.
STEIN, J.: 1992, 'Price Discovery Processes', Economic Record, pp. 34-45.
WILSON, ROBERT: 1992, 'Strategic Analysis of AUctions', Handbook of Game Theory, Vol. I (R. Aumann and S. Hart eds.), Elsevier Science Publishers, B.V.