ARROW–DEBREU EQUILIBRIA FOR RANK‐DEPENDENT UTILITIES. (20th May 2014)

• Record Type: Journal Article
• Authors: Xia, Jianming; Zhou, Xun Yu
• Is Part Of: Mathematical finance. Volume 26:Number 3(2016:Jul.)
• Page Start: 558
• Page End: 588
• Publication Date: 2014-05-20
• Subjects: rank‐dependent utility -- probability weighting -- Arrow‐Debreu equilibrium -- state‐price density; Business mathematics -- Periodicals; 332
• DOI: 10.1111/mafi.12070
• Languages: English
• ISSNs: 0960-1627

Abstract

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.