ARROW–DEBREU EQUILIBRIA FOR RANK‐DEPENDENT UTILITIES |
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| Authors: | Jianming Xia Xun Yu Zhou |
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| Institution: | 1. Academy of Mathematics and Systems ScienceChinese Academy of Sciences;2. East China Normal University, The Chinese University of Hong Kong, and University of Oxford |
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| Abstract: | We provide conditions on a one‐period‐two‐date pure exchange economy with rank‐dependent utility agents under which Arrow–Debreu equilibria exist. When such an equilibrium exists, we show that the state‐price density is a weighted marginal rate of intertemporal substitution of a representative agent, where the weight depends on the differential of the probability weighting function. Based on the result, we find that asset prices depend upon agents' subjective beliefs regarding overall consumption growth, and we offer a direction for possible resolution of the equity premium puzzle. |
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| Keywords: | rank‐dependent utility probability weighting Arrow‐Debreu equilibrium state‐price density |
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