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JournalISSN: 0022-0531

Journal of Economic Theory 

About: Journal of Economic Theory is an academic journal. The journal publishes majorly in the area(s): Nash equilibrium & Repeated game. It has an ISSN identifier of 0022-0531. Over the lifetime, 4741 publication(s) have been published receiving 334647 citation(s).

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Abstract: Examines the arbitrage model of capital asset pricing as an alternative to the mean variance capital asset pricing model introduced by Sharpe, Lintner and Treynor. Overview of the arbitrage theory; Role of the arbitrage model in explaining phenomena observed in capital markets for risky assets; Influence of the presence of noise on the pricing relation. (Из Ebsco)

6,388 citations

Journal ArticleDOI
Abstract: Measures of inequality are used by economists to answer a wide range of questions. Is the distribution of income more equal than it was in the past? Are underdeveloped countries characterised by greater inequality than advanced countries ? Do taxes lead to greater equality in the distribution of income or wealth? However, despite the wide use of these measures, relatively little attention has been given to the conceptual problems involved in the measurement of inequality and there have been few contributions to the theoretical foundations of the subject. In this paper, I try to clarify some of the basic issues, to examine the properties of the measures that are commonly employed, and to discuss a possible new approach. In the course of this, I draw on the parallel with the formally similar problem of measuring risk in the theory of decisionmaking under uncertainty and make use of recent results in this fie1d.l The problem with which we are concerned is basically that of comparing two frequency distributions f(u) of an attribute y which for convenience I shall refer to as income. The conventional approach in nearly all empirical work is to adopt some summary statistic of inequality such as the variance, the coefficient of variation or the Gini coefficientwith no very explicit reason being given for preferring one measure rather than another. As, however, was pointed out by Dalton 50 years ago in his pioneering article [3], underlying any such measure is some concept of social welfare and it is with this concept that we should be concerned. He argued that we should approach the question by considering directly the form of the social welfare function to be employed. If we follow him in assuming that this would be an additively separable and symmetric 1 My interest in the question of measuring inequality was originally stimulated by reading an early version of the paper by Rothschild and Stiglitz [13], to which I owe a great deal.

4,772 citations

Journal ArticleDOI
Abstract: Publisher Summary A common hypothesis about the behavior of limited liability asset prices in perfect markets is the random walk of returns or in its continuous-time form the geometric Brownian motion hypothesis, which implies that asset prices are stationary and log-normally distributed. A number of investigators of the behavior of stock and commodity prices have questioned the accuracy of the hypothesis. In an earlier study described in the chapter, it was examined that the continuous-time consumption-portfolio problem for an individual whose income is generated by capital gains on investments in assets with prices assumed to satisfy the “geometric Brownian motion” hypothesis. Under the additional assumption of a constant relative or constant absolute risk-aversion utility function, explicit solutions for the optimal consumption and portfolio rules were derived. The changes in these optimal rules with respect to shifts in various parameters such as expected return, interest rates, and risk were examined by the technique of comparative statics. This chapter presents an extension of these results for more general utility functions, price behavior assumptions, and income generated also from noncapital gains sources. If the geometric Brownian motion hypothesis is accepted, then a general separation or mutual fund theorem can be proved such that, in this model, the classical Tobin mean-variance rules hold without the objectionable assumptions of quadratic utility or of normality of distributions for prices. Hence, when asset prices are generated by a geometric Brownian motion, the two-asset case can be worked on without loss of generality.

4,736 citations

Journal ArticleDOI
Abstract: This paper provides a simple example of an economy in which equilibrium prices and quantities exhibit what may be the central feature of the modern business cycle: a systematic relation between the rate of change in nominal prices and the level of real output. The relationship, essentially a variant of the well-known Phillips curve, is derived within a framework from which all forms of “money illusion” are rigorously excluded: all prices are market clearing, all agents behave optimally in light of their objectives and expectations, and expectations are formed optimally (in a sense to be made precise below). Exchange in the economy studied takes place in two physically separated markets. The allocation of traders across markets in each period is in part stochastic, introducing fluctuations in relative prices between the two markets. A second source of disturbance arises from stochastic changes in the quantity of money, which in itself introduces fluctuations in the nominal price level (the average rate of exchange between money and goods). Information on the current state of these real and monetary disturbances is transmitted to agents only through prices in the market where each agent happens to be. In the particular framework presented below, prices convey this information only imperfectly, forcing agents to hedge on whether a particular price movement results from a relative demand shift or a nominal (monetary) one. This hedging behavior results in a nonneutrality of money, or broadly speaking a Phillips curve, similar in nature to that which we observe in reality. At the same time, classical results on the long-run neutrality of money, or independence of real and nominal magnitudes, continue to hold. These features of aggregate economic behavior, derived below within a particular, abstract framework, bear more than a surface resemblance to

4,246 citations

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