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Are Sunspots Inevitable?

Author

Listed:
  • Christophe Prechac
  • Aditya Goenka

Abstract

This paper examines the welfare of consumers in an incomplete markets economy with extrinsic uncertainty. It is shown that the utility of one consumer may be minimized at the Walrasian allocation relative to all other equilibrium allocations for a given security structure. Thus, this consumer will have no incentive to trade the new securities if they complete the insurance markets.

Suggested Citation

  • Christophe Prechac & Aditya Goenka, 2004. "Are Sunspots Inevitable?," Econometric Society 2004 Far Eastern Meetings 786, Econometric Society.
    • Handle: RePEc:ecm:feam04:786
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    File URL: http://repec.org/esFEAM04/up.3694.1082347741.pdf
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    References listed on IDEAS

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    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    2. Balasko, Yves, 1983. "Extrinsic uncertainty revisited," Journal of Economic Theory, Elsevier, vol. 31(2), pages 203-210, December.
    3. Elul Ronel, 1995. "Welfare Effects of Financial Innovation in Incomplete Markets Economies with Several Consumption Goods," Journal of Economic Theory, Elsevier, vol. 65(1), pages 43-78, February.
    4. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February.
    5. Balasko, Yves & Cass, David, 1989. "The Structure of Financial Equilibrium with Exogenous Yields: The Case of Incomplete Markets," Econometrica, Econometric Society, vol. 57(1), pages 135-162, January.
    6. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
    7. David Cass & Alessandro Citanna, 1998. "Pareto improving financial innovation in incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(3), pages 467-494.
    8. Ronel Elul, 1999. "Welfare-improving financial innovation with a single good," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 13(1), pages 25-40.
    9. David Cass, 1989. "Sunspots and Incomplete Financial Markets: The Leading Example," Palgrave Macmillan Books, in: George R. Feiwel (ed.), The Economics of Imperfect Competition and Employment, chapter 25, pages 677-693, Palgrave Macmillan.
    10. Karl Shell & Aditya Goenka, 1996. "When sunspots don't matter (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 9(1), pages 169-178.
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    More about this item

    Keywords

    Sunspot equilibrium; incomplete markets; financial innovation; welfare analysis.;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • D60 - Microeconomics - - Welfare Economics - - - General

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