Financial Markets for Unknown Risks
18 Pages Posted: 5 Feb 2010
There are 2 versions of this paper
Date Written: 1998
Abstract
The present paper draws on recent findings of Chichilnisky and Wu [5] and Cass et al. [4], both of which study resource allocation with individual risks. Both of these papers develop further Malinvaud's [15,16] original formulation of general equilibrium with individual risks, and Arrow's [1] formulation of the role of securities in the optimal allocation of risk-bearing. Our results are valid for large but finite economies with agents who face unknown risks and who have diverse opinions about these risks: in contrast, Malinvaud's results are asymptotic, valid for a limiting economy with an infinite population, and deal only with a known distribution of risks. Our results use the formulation of incomplete asset markets for individual risks used to study default in [5, section 5.c]. The risks considered here are unknown and possibly unknowable, and each individual has potentially a different opinion about these risks, while Chichilnisky and Wu [5] and Cass et al. [4] assume that all risk is known.
Suggested Citation: Suggested Citation