ULME Research Seminars:

On Thursday, February, 6 2025, Prof. Frank Riedel (University of Bielefeld) will give a lecture at 16:15 as part of the ULME Research Seminars. His topic is: "Excessive Trade in Financial Markets due to Heterogeneous Beliefs - and how to deal with it". Prof Riedel will be around on Thuesday and afterwards there will be the opportunity to accompany Prof Riedel to dinner. If you are interested, please contact Prof Dr Sandra Ludwig (sandra.ludwig(at)uni-ulm.de).

Abstract: 

Heterogeneous beliefs among market participants can lead to questionable speculative trading that goes beyond any risk-sharing motives. We demonstrate that such unwarranted betting behavior in market equilibrium can be mitigated by introducing nonlinear pricing for ambiguous contracts, without compromising legitimate risk-hedging activities.  

While Arrow-Debreu equilibria generally fail to achieve belief-neutral efficiency, we establish a modified version of the first welfare theorem in which equilibria with nonlinear prices uphold belief-neutral efficiency. Moreover, we show that belief-neutral efficiency, as a regulatory criterion, can be ensured by introducing transaction costs.