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Futures market equilibrium under Knightian uncertainty

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  • Donald Lien
  • Yaqin Wang

Abstract

This paper examines the effects of Knightian uncertainty on a commodity futures market within the Newbery‐Stiglitz framework. It is shown that Knightian traders act more conservatively. In a partial trade equilibrium, risk aversion and Knightian uncertainty have qualitatively similar effects on the equilibrium price and the equilibrium trading volume. Full‐trade and no‐trade equilibria are likely to prevail when the producer and the speculator incur different Knightian uncertainty. Herein different impacts of risk aversion and Knightian uncertainty are observed. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:701–718, 2003

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  • Donald Lien & Yaqin Wang, 2003. "Futures market equilibrium under Knightian uncertainty," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 23(7), pages 701-718, July.
    • Handle: RePEc:wly:jfutmk:v:23:y:2003:i:7:p:701-718
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    Cited by:

    1. Lien, Donald & Yu, Chia-Feng (Jeffrey), 2017. "Production and hedging with optimism and pessimism under ambiguity," International Review of Economics & Finance, Elsevier, vol. 50(C), pages 122-135.

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