Risk-free bond prices in incomplete markets with recursive multiple-prior utilities |
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Authors: | Chiaki Hara Atsushi Kajii |
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Institution: | Institute of Economic Research, Kyoto University, Kyoto, Japan. Email:;Institute of Economic Research, Kyoto University, Kyoto, Japan. |
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Abstract: | We consider an exchange economy under uncertainty, in which agents' utility functions may be recursive and the expected utility calculation may be based on multiple priors. The utility functions representing risk attitudes and intertemporal substitution are negative exponential functions. These utility functions and the access to asset markets may arbitrarily differ across agents. We prove that the risk-free bond price goes down (and the interest rate goes up) monotonically as the market incompleteness diminishes. We also find the range of equilibrium bond prices that depends on the primitives of the economy but not on the structures of asset markets. |
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Keywords: | constant absolute risk aversion general equilibrium with incomplete asset markets heterogeneity multiple priors recursive utility risk-free rate puzzle |
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