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Speculative trade under ambiguity

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  • Werner, Jan

Abstract

Ambiguous beliefs may lead to speculative trade and speculative bubbles. We demonstrate this by showing that the classical Harrison and Kreps (1978) example of speculative trade among agents with heterogeneous beliefs can be replicated with agents having common but ambiguous beliefs. More precisely, we show that the same asset prices and pattern of trade can be obtained in equilibrium with agents' having recursive multiple-prior expected utilities with common set of priors.

Suggested Citation

  • Werner, Jan, 2022. "Speculative trade under ambiguity," Journal of Economic Theory, Elsevier, vol. 199(C).
    • Handle: RePEc:eee:jetheo:v:199:y:2022:i:c:s002205312100017x
    DOI: 10.1016/j.jet.2021.105200
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    1. Wei Xiong & Jialin Yu, 2011. "The Chinese Warrants Bubble," Working Papers 1398, Princeton University, Department of Economics, Econometric Research Program..
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    8. Stephen Morris, 1996. "Speculative Investor Behavior and Learning," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(4), pages 1111-1133.
    9. Larry G. Epstein & Martin Schneider, 2007. "Learning Under Ambiguity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(4), pages 1275-1303.
    10. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
    11. Epstein, Larry G. & Schneider, Martin, 2003. "IID: independently and indistinguishably distributed," Journal of Economic Theory, Elsevier, vol. 113(1), pages 32-50, November.
    12. H. Henry Cao & Tan Wang & Harold H. Zhang, 2005. "Model Uncertainty, Limited Market Participation, and Asset Prices," The Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1219-1251.
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    16. Han Ozsoylev & Jan Werner, 2011. "Liquidity and asset prices in rational expectations equilibrium with ambiguous information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 48(2), pages 469-491, October.
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    24. J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(2), pages 323-336.
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    Cited by:

    1. Yang Hao, 2023. "Financial Market with Learning from Price under Knightian Uncertainty," Working Papers hal-03686748, HAL.
    2. Sujoy Mukerji & Han N. Ozsoylev & Jean‐Marc Tallon, 2023. "Trading Ambiguity: A Tale Of Two Heterogeneities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(3), pages 1127-1164, August.

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    More about this item

    Keywords

    Speculative trade; Ambiguity; Speculative bubbles;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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