UNCERTAINTY, RISK-NEUTRAL MEASURES AND SECURITY PRICE BOOMS AND CRASHES

This paper provides a general analysis of intertemporal utility based on the multiple-priors model of aversion to ''Knightian'' uncertainty. Then the existence of equilibrium is proven for a representative agent security market model. It is shown that uncertainty aversion can invalidate the existence of a risk-neutral measure representation for prices. In addition, an example suggests an intriguing link between uncertainty aversion and the possibility of abrupt changes in security prices. The analysis relies heavily on a Fubini-type theorem for analytic functions due to Dellacherie and Meyer, (= Probabilities and Potential C, North-Holland, New York, 1988). (C) 1995 Academic Preis, Inc.