Price formation under uncertainty

 

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dc.contributor.advisor Abraham, Haim en_ZA
dc.contributor.author Du Preez, Johan en_ZA
dc.date.accessioned 2015-11-16T03:55:03Z
dc.date.available 2015-11-16T03:55:03Z
dc.date.issued 2003 en_ZA
dc.identifier.citation Du Preez, J. 2003. Price formation under uncertainty. University of Cape Town. en_ZA
dc.identifier.uri http://hdl.handle.net/11427/14975
dc.description Bibliography: leaves 170-173. en_ZA
dc.description.abstract The analysis presented in this thesis is aimed at better understanding the role of expectations to the price formation process. Since general competitive analysis lacks a coherent explanation of how expectations are formulated it is difficult to promote theories that assume agents have no structural knowledge in favour of theories that assume agents have significant structural knowledge, e.g. rational expectations hypothesis versus the theory of rational beliefs. Accordingly, empirical evidence is presented to support analyses of models in which agents are not assumed to have structural knowledge. Simple general equilibrium models are used to illustrate that modelling risk requires a thorough analysis of investor expectations embedded in asset prices to better understand the information conveyed by observed risk premia. Analysis of the role of diverse expectations in competitive equilibria shows that a prerequisite for the existence of a short-run Walrasian monetary equilibrium is the existence of at least one agent whose expectations are insensitive to current prices. Ergodic theory shows that any stable dynamical system generates a stationary probability measure based on its underlying generating probability that is unrelated to the data generated by the dynamical system. This result is used to show that the conditions under which diverse beliefs arise are sufficiently general to warrant the study of the impact of diverse expectations on the price formation process. Enthusiasm for models that allow diverse beliefs is however tempered by a review of Sunspot theory that show that it is not necessary to abandon the rational expectations hypothesis in order for competitive markets to be subject to speculative fluctuations that are driven by expectations. This analysis is reinforced by a known example that shows that adaptive learning rules can lead rational agents to believe in nonstationary, indeterminate equilibria that are locally stable, such as Sunspot Equilibria. This leads to an important conclusion; diverse beliefs are not temporary phenomena since disequilibrium-learning analysis cannot be relied on to teach investors the economy's equilibrium map. en_ZA
dc.language.iso eng en_ZA
dc.subject.other Economics en_ZA
dc.title Price formation under uncertainty en_ZA
dc.type Master Thesis
uct.type.publication Research en_ZA
uct.type.resource Thesis en_ZA
dc.publisher.institution University of Cape Town
dc.publisher.faculty Faculty of Commerce en_ZA
dc.publisher.department School of Economics en_ZA
dc.type.qualificationlevel Masters
dc.type.qualificationname MCom en_ZA
uct.type.filetype Text
uct.type.filetype Image
dc.identifier.apacitation Du Preez, J. (2003). <i>Price formation under uncertainty</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,School of Economics. Retrieved from http://hdl.handle.net/11427/14975 en_ZA
dc.identifier.chicagocitation Du Preez, Johan. <i>"Price formation under uncertainty."</i> Thesis., University of Cape Town ,Faculty of Commerce ,School of Economics, 2003. http://hdl.handle.net/11427/14975 en_ZA
dc.identifier.vancouvercitation Du Preez J. Price formation under uncertainty. [Thesis]. University of Cape Town ,Faculty of Commerce ,School of Economics, 2003 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/14975 en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Du Preez, Johan AB - The analysis presented in this thesis is aimed at better understanding the role of expectations to the price formation process. Since general competitive analysis lacks a coherent explanation of how expectations are formulated it is difficult to promote theories that assume agents have no structural knowledge in favour of theories that assume agents have significant structural knowledge, e.g. rational expectations hypothesis versus the theory of rational beliefs. Accordingly, empirical evidence is presented to support analyses of models in which agents are not assumed to have structural knowledge. Simple general equilibrium models are used to illustrate that modelling risk requires a thorough analysis of investor expectations embedded in asset prices to better understand the information conveyed by observed risk premia. Analysis of the role of diverse expectations in competitive equilibria shows that a prerequisite for the existence of a short-run Walrasian monetary equilibrium is the existence of at least one agent whose expectations are insensitive to current prices. Ergodic theory shows that any stable dynamical system generates a stationary probability measure based on its underlying generating probability that is unrelated to the data generated by the dynamical system. This result is used to show that the conditions under which diverse beliefs arise are sufficiently general to warrant the study of the impact of diverse expectations on the price formation process. Enthusiasm for models that allow diverse beliefs is however tempered by a review of Sunspot theory that show that it is not necessary to abandon the rational expectations hypothesis in order for competitive markets to be subject to speculative fluctuations that are driven by expectations. This analysis is reinforced by a known example that shows that adaptive learning rules can lead rational agents to believe in nonstationary, indeterminate equilibria that are locally stable, such as Sunspot Equilibria. This leads to an important conclusion; diverse beliefs are not temporary phenomena since disequilibrium-learning analysis cannot be relied on to teach investors the economy's equilibrium map. DA - 2003 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2003 T1 - Price formation under uncertainty TI - Price formation under uncertainty UR - http://hdl.handle.net/11427/14975 ER - en_ZA


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