Ambiguity and Rational Expectations Equilibria

Abstract

This paper proves the existence and robustness of partially-revealing rational expectations equilibria (REE) when this equilibrium concept is expanded to allow for some agents to have preferences that display ambiguity aversion. Furthermore, the generic existence of fully-revealing REE is proven for a commonly-used subset of the class of ambiguity averse preferences. This finding illustrates that models with ambiguity aversion provide a relatively tractable framework through which partial information revelation may be studied in a general equilibrium setting without relying on particular distributional assumptions or the presence of noise traders. Constructive examples provide further insight into the properties of these equilibria.

Ambiguity in asset pricing and portfolio choice: a review of the literature

“…Even though it is often the case that the most important breakthroughs may happen exactly where they are not expected, in our minds it appears safe to say that considerable progress should be welcomed from papers that explore the interaction between ambiguity aversion and the presence of asymmetric information. For instance, Condie and Ganguli (2009) show that if an ambiguity averse investor has private information, then portfolio inertia a' la Dow and Werlang (1992) A different issue is whether and how the ever growing class of financial models we have reviewed in this paper has already impacted the way in which applied (financial) economists, policy-makers, and commentators perceive and interpret economic phenomena. We must admit that-because the topic of the existence of "risks" in economic decision making that are hardly quantifiable in a (S)EU perspective had been addressed by a few of the founding fathers of economics and decision theory alike, among them Arrow, Hurwicz, Keynes, Knight, Raiffa, and Wald (in no order whatsoever)-even though research on decision making under ambiguity has witnessed an acceleration during the 1990s, informal arguments connecting poorly understood phenomena to aversion to uncertainty have been appearing among both academics and practitioners at least since the 1930s.…”

Condorcet meets Ellsberg

“…For instance, Condie and Ganguli (2011) demonstrate a failure of information transmission with ambiguity averse agents in general equilibrium. They show that a rational expectations equilibrium for an exchange economy may be partially revealing when agents are ambiguity averse; in contrast, fully revealing equilibria are generic with SEU agents.…”

Do Markets Prove Pessimists Right?

“…For economies with ambiguity aversion, Condie and Ganguli () show that equilibrium prices are only partially revealing for a generic set of economies. This result raises questions about the equilibrium pricing function approach in a model where decision makers face ambiguity.…”