Probability and Computational Finance Seminar

Frank Riedel
Bielefeld
Title: Market Breakdown and Indeterminacy under Model Uncertainty

Abstract: We study a dynamic financial market with model (or "Knightian") uncertainty when agents use the inertia principle proposed by Bewley. We characterize efficient allocations and equilibria in abstract economies. In a second step, we study a mean--variance version of the model where agents face risk as well as (model) uncertainty. We show that trade occurs in the risky part of the market whereas trade in the uncertain assets breaks down when model uncertainty passes a certain threshold. We also show that equilibria with inertia are indeterminate so that equilibrium prices may fluctuate in a certain range around one "focal" equilibrium.

Pdf File: Riedel_Frank.pdf
Date: Monday, April 23, 2012
Time: 5:00 pm
Location: Wean Hall 5409
Submitted by:  Kasper Larsen