Market Prices of Risk with Diverse Beliefs, Learning, and Catastrophes
- (pp. 141-46)
AbstractWe compare market prices of risk in economies with identical patterns of endowments, priors, and information flows, but two different market structures, one with complete markets, another in which consumers can trade only a single risk-free bond. We study how opportunities to speculate, uncommon priors, and learning affect market prices of risk. Two types of consumers have diverse beliefs about the law of motion for a random exogenous endowment. One type knows the true law of motion while the other type learns about it via Bayes' theorem. Less-well-informed consumers are pessimistic, initially overestimating the probability of a catastrophic state. Learning dynamics and the wealth dynamics that they drive contribute to differences in evolutions of market prices of risk across market structures.
Citation2012. "Market Prices of Risk with Diverse Beliefs, Learning, and Catastrophes." American Economic Review, 102(3): 141-46. DOI: 10.1257/aer.102.3.141
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D83 Search; Learning; Information and Knowledge; Communication; Belief
- D40 Market Structure and Pricing: General