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 agen t security market model. It is shown that uncertainty aversion can inv alidate the existence of a risk-neutral measure representation for pri ces. In addition, an example suggests an intriguing link between uncer tainty aversion and the possibility of abrupt changes in security pric es. 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.