Belief-neutral efficiency in financial markets
Beißner P, Riedel F (2025) Center for Mathematical Economics Working Papers; 702.
Bielefeld: Center for Mathematical Economics.
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Abstract / Bemerkung
Heterogeneous beliefs among market participants can lead to questionable speculative trading that goes beyond any risk-sharing motives.
We demonstrate that such unwarranted betting behavior in market equilibrium can be mitigated by introducing nonlinear pricing for ambiguous contracts, without compromising legitimate risk-hedging activities.
While Arrow-Debreu equilibria generally fail to achieve belief-neutral efficiency, we establish a modified version of the first welfare theorem in which equilibria with nonlinear prices uphold belief-neutral efficiency.
Moreover, we show that belief-neutral efficiency can be ensured by introducing suitable transaction costs for ambiguous financial assets.
We demonstrate that such unwarranted betting behavior in market equilibrium can be mitigated by introducing nonlinear pricing for ambiguous contracts, without compromising legitimate risk-hedging activities.
While Arrow-Debreu equilibria generally fail to achieve belief-neutral efficiency, we establish a modified version of the first welfare theorem in which equilibria with nonlinear prices uphold belief-neutral efficiency.
Moreover, we show that belief-neutral efficiency can be ensured by introducing suitable transaction costs for ambiguous financial assets.
Stichworte
Belief-Neutral Pareto efficiency;
Heterogeneous Beliefs;
Knightian Uncertainty;
Ambiguity;
General Equilibrium
Erscheinungsjahr
2025
Serientitel
Center for Mathematical Economics Working Papers
Band
702
Seite(n)
25
Urheberrecht / Lizenzen
ISSN
0931-6558
Page URI
https://pub.uni-bielefeld.de/record/3001086
Zitieren
Beißner P, Riedel F. Belief-neutral efficiency in financial markets. Center for Mathematical Economics Working Papers. Vol 702. Bielefeld: Center for Mathematical Economics; 2025.
Beißner, P., & Riedel, F. (2025). Belief-neutral efficiency in financial markets (Center for Mathematical Economics Working Papers, 702). Bielefeld: Center for Mathematical Economics.
Beißner, Patrick, and Riedel, Frank. 2025. Belief-neutral efficiency in financial markets. Vol. 702. Center for Mathematical Economics Working Papers. Bielefeld: Center for Mathematical Economics.
Beißner, P., and Riedel, F. (2025). Belief-neutral efficiency in financial markets. Center for Mathematical Economics Working Papers, 702, Bielefeld: Center for Mathematical Economics.
Beißner, P., & Riedel, F., 2025. Belief-neutral efficiency in financial markets, Center for Mathematical Economics Working Papers, no.702, Bielefeld: Center for Mathematical Economics.
P. Beißner and F. Riedel, Belief-neutral efficiency in financial markets, Center for Mathematical Economics Working Papers, vol. 702, Bielefeld: Center for Mathematical Economics, 2025.
Beißner, P., Riedel, F.: Belief-neutral efficiency in financial markets. Center for Mathematical Economics Working Papers, 702. Center for Mathematical Economics, Bielefeld (2025).
Beißner, Patrick, and Riedel, Frank. Belief-neutral efficiency in financial markets. Bielefeld: Center for Mathematical Economics, 2025. Center for Mathematical Economics Working Papers. 702.
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