Arrow-Debreu Equilibria for Rank-Dependent Utilities

31 Pages Posted: 10 Jun 2016

See all articles by Jianming Xia

Jianming Xia

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Sciences

Xun Yu Zhou

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management

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Date Written: July 2016

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.

Keywords: rank‐dependent utility, probability weighting, Arrow‐Debreu equilibrium, state‐price density

Suggested Citation

Xia, Jianming and Zhou, Xun Yu, Arrow-Debreu Equilibria for Rank-Dependent Utilities (July 2016). Mathematical Finance, Vol. 26, Issue 3, pp. 558-588, 2016, Available at SSRN: https://ssrn.com/abstract=2793597 or http://dx.doi.org/10.1111/mafi.12070

Jianming Xia (Contact Author)

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Sciences ( email )

Zhong-Guan-Cun-Dong-Lu 55, Haidian District
Beijing 100190
China

Xun Yu Zhou

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management ( email )

Shatin, New Territories
Hong Kong
852 2609-8320 (Phone)
852 2603-5505 (Fax)

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