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Speculative Trade Equilibria with Incorrect Price Anticipations

16 July 2013
Publication Type: Working Paper
Economic Theme: Public Finance
JEL Code: D51, D53, G02

This paper introduces an equilibrium concept for boundedly rational agents who base their demand-supply decisions on incorrect price anticipations. Formally, we differentiate between equilibrium and out-of-equilibrium states. If the agents attach zero prior probability to all out-of-equilibrium states, our equilibrium concept coincides with Radner’s (1979) concept of rational expectations equilibria (=REE). In contrast to REE, however, there may exist strict incentives for speculative asset trade whenever boundedly rational agents regard out-of-equilibrium states as possible.

Working paper 358
1 July 2013
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