A two-person dynamic equilibrium under ambiguity

✍ Scribed by Larry G. Epstein; Jianjun Miao

• Publisher: Elsevier Science
• Year: 2003
• Tongue: English
• Weight: 325 KB
• Volume: 27
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(02)00059-3

✦ Synopsis

This paper describes a pure-exchange, continuous-time economy with two heterogeneous agents and complete markets. A novel feature of the economy is that agents perceive some security returns as ambiguous in the sense often attributed to Frank Knight. The equilibrium is described completely in closed-form. After identifying agents as countries, the model is applied to address the consumption home bias and equity home-bias puzzles.