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Macroeconomic Theory$
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Jean-Pascal Benassy

Print publication date: 2011

Print ISBN-13: 9780195387711

Published to Oxford Scholarship Online: April 2015

DOI: 10.1093/acprof:osobl/9780195387711.001.0001

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Uncertainty and Financial Assets

Uncertainty and Financial Assets

(p.118) 6 Uncertainty and Financial Assets
Macroeconomic Theory

Jean-Pascal Bénassy

Oxford University Press

This chapter provides an overview of uncertainty at the individual and general equilibrium level. It evaluates the behavior of an individual who has to take decisions in uncertain environments. It looks at the traditional expected utility maximization theory, and also provides a few measures of risk aversion. Further, it presents the most classic model of general equilibrium under uncertainty, the Arrow-Debreu model, which is also called a model with “complete markets.” This model conventionally serves as a central benchmark to which other concepts are compared. The chapter then describes the models of “incomplete markets.” It confers a general description of financial securities, and explains the disparity between a complete market and incomplete market. Moreover, it discusses the financial assets pricing in complete or an incomplete markets. It shows the application of the pricing formulas to compare safe and risky assets. Lastly, it sets forth the idea of “nonexpected utility,” which sorts out the concepts of risk aversion and substitutability.

Keywords:   uncertainty, risk aversion, Arrow-Debreu model, complete market, incomplete market, financial assets pricing, substitutability

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