1. MARKET EQUILIBRIUM IN A MULTIPERIOD STATE PREFERENCE MODEL WITH LOGARITHMIC UTILITY.
- Author
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KRAUS, ALAN and LITZENBERGER, ROBERT H.
- Subjects
MARKET equilibrium ,PORTFOLIO management (Investments) ,UNCERTAINTY ,UTILITY functions ,EXPECTED returns ,FINANCIAL markets ,LOGARITHMIC functions ,CAPITAL investments ,CAPITAL market ,ECONOMIC equilibrium ,SECURITIES trading ,RATE of return ,CAPITAL assets pricing model ,EXCHANGE - Abstract
The present paper examines a time state preference model of exchange under the assumption that individuals have time-state-independent multiperiod logarithmic utility functions. Prior contributions of Dreze and Modigliani and Myers to multiperiod state preference theory are static since there are no possibilities for trading in intermediate periods and individuals acquire in the current period their state-contingent consumption claims for all future periods. In contrast, the myopic property of time-state-independent logarithmic utility permits consideration of trading in all intermediate periods. Since the model deals only with exchange equilibrium, investment in real assets and production are assumed to be exogenous. Thus, the aggregate amount of consumption for the whole economy in each state in each time period is exogenous. The securities traded in the capital market are bundles of claims on end of period wealth contingent on particular states of the world. It is assumed that the structure of the capital market permits individuals to establish separate contingent claims for those states of the world on whose probability of occurrence beliefs differ. The present paper examines a time state preference model of exchange under the assumption that individuals have time-state-independent multiperiod logarithmic utility functions. Prior contributions of Dreze and Modigliani and Myers to multiperiod state preference theory are static since there are no possibilities for trading in intermediate periods and individuals acquire in the current period their state-contingent consumption claims for all future periods. In contrast, the myopic property of time-state-independent logarithmic utility permits consideration of trading in all intermediate periods. Since the model deals only with exchange equilibrium, investment in real assets and production are assumed to be exogenous. Thus, the aggregate amount of consumption for the whole economy in each state in each time... [ABSTRACT FROM AUTHOR]
- Published
- 1975
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