Can future systemic financial risks be quantified? Ergodic vs nonergodic stochastic processes
By: DAVIDSON, Paul
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ArticlePublisher: São Paulo : Editora 34, out./dez. 2009Revista de Economia Política = Brazilian Journal of Political Economy 29, 4, p. 324-340Abstract: Different axioms underlie efficient market theory and Keyness liquidity preference theory. Efficient market theory assumes the ergodic axiom. Consequently, todays decision makers can calculate with actuarial precision the future value of all possible outcomes resulting from todays decisions. Since in an efficient market world decision makers know their intertemporal budget constraints, decision makers never default on a loan, i.e., systemic defaults, insolvencies, and bankruptcies are impossible. Keynes liquidity preference theory rejects the ergodic axiom. The future is ontologically uncertain. Accordingly systemic defaults and insolvencies can occur but can never be predicted in advance.
Different axioms underlie efficient market theory and Keyness liquidity preference theory. Efficient market theory assumes the ergodic axiom. Consequently, todays decision makers can calculate with actuarial precision the future value of all possible outcomes resulting from todays decisions. Since in an efficient market world decision makers know their intertemporal budget constraints, decision makers never default on a loan, i.e., systemic defaults, insolvencies, and bankruptcies are impossible. Keynes liquidity preference theory rejects the ergodic axiom. The future is ontologically uncertain. Accordingly systemic defaults and insolvencies can occur but can never be predicted in advance.
v. 29, n. 4(116)
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