Book contents
- Frontmatter
- Contents
- List of Contributors
- Preface
- 1 Sorting, Education, and Inequality
- 2 Wage Equations and Education Policy
- Empirical and Theoretical Issues in the Analysis of Education Policy: A Discussion of the Papers by Raquel
- 3 Toward a Theory of Competition Policy
- 4 Identification and Estimation of Cost Functions Using Observed Bid Data: An Application to Electricity Markets
- 5 Liquidity, Default, and Crashes: Endogenous Contracts in General Equilibrium
- 6 Trading Volume
- A Discussion of the Papers by John Geanakoplos and by Andrew W. Lo and Jiang Wang
- 7 Inverse Problems and Structural Econometrics: The Example of Instrumental Variables
- 8 Endogeneity in Nonparametric and Semiparametric Regression Models
- Endogeneity and Instruments in Nonparametric Models: A Discussion of the Papers by Jean-Pierre Florens and by Richard Blundell and James L. Powell
- Index
A Discussion of the Papers by John Geanakoplos and by Andrew W. Lo and Jiang Wang
Published online by Cambridge University Press: 23 December 2009
- Frontmatter
- Contents
- List of Contributors
- Preface
- 1 Sorting, Education, and Inequality
- 2 Wage Equations and Education Policy
- Empirical and Theoretical Issues in the Analysis of Education Policy: A Discussion of the Papers by Raquel
- 3 Toward a Theory of Competition Policy
- 4 Identification and Estimation of Cost Functions Using Observed Bid Data: An Application to Electricity Markets
- 5 Liquidity, Default, and Crashes: Endogenous Contracts in General Equilibrium
- 6 Trading Volume
- A Discussion of the Papers by John Geanakoplos and by Andrew W. Lo and Jiang Wang
- 7 Inverse Problems and Structural Econometrics: The Example of Instrumental Variables
- 8 Endogeneity in Nonparametric and Semiparametric Regression Models
- Endogeneity and Instruments in Nonparametric Models: A Discussion of the Papers by Jean-Pierre Florens and by Richard Blundell and James L. Powell
- Index
Summary
INTRODUCTION
At first sight, the two papers in this section seem unrelated. The one by John Geanakoplos is about the role of collateral in explaining liquidity crises and crashes. Andrew Lo and Jiang Wiang's paper is concerned with a theoretical and empirical analysis of trading volume. However, on closer inspection, they have important interrelationships and provide an interesting contrast. They both trace their intellectual roots back to the Arrow–Debreu model, yet they represent two very different approaches to financial economics, both of which are widely used.
The papers investigate deviations from the standard perfect-markets assumption. Frictions are incorporated in a different way, though. In the Geanakoplos paper, the problem is preventing default, and collateral is the way this is achieved. In the Lo and Wang paper, there are asymmetric information and fixed transaction costs. What is more important is that the motivations for trade are quite different. In the Geanakoplos paper, it is differences in beliefs; in the Lo and Wang paper, it is different shocks to nonfinancial income. Both of these assumptions are crucial to the results the authors obtain. They represent quite different traditions.
The Geanakoplos paper is a mainstream general equilibrium paper. In the Arrow–Debreu model, the possibility of differences in preferences is an important component of the model. Because beliefs are embedded in preferences, allowing different beliefs is a standard assumption.
In finance, and in particular in asset pricing, allowing different beliefs is currently viewed as a nonstandard assumption.
- Type
- Chapter
- Information
- Advances in Economics and EconometricsTheory and Applications, Eighth World Congress, pp. 278 - 283Publisher: Cambridge University PressPrint publication year: 2003