Risk in General Equilibrium: Temporality and Performativity in the Ontology of Finance

This paper reconstructs the ontology of finance as it is presented in Kenneth Arrow’s general equilibrium model of contingent commodities. The fundamental notion of modern finance, ‘Arrow securities’ (paying one monetary unit contingent upon a certain future event and nothing otherwise) is considered an elementary Luhmannian code of the economic. The performative, self-implementing tendencies in general equilibrium analysis are reinterpreted in view of the joint risk design as conceived by Dirk Baecker. Creating new (markets for) risks to control the future can be, on the one hand, traced back/justified with reference to Arrow’s world of contingent commodities and, on the other, rationalized as a way of adjusting the economic system and moving reality closer to its theoretical portrayal. I also associate the creation of the new ‘risk structures’ with the new overarching temporality inviting us to tame uncertainty and govern the future.

Heterogeneous Beliefs, Wealth Distribution, and Asset Markets with Risk of Default

We study asset markets and wealth dynamics in the economy with heterogeneous beliefs and risk of default. Agents can trade a full set of Arrow securities but are allowed to default on their delivery promises. Financial markets rationally subject agents to the endogenous “no-default” borrowing limits. Because of the rich menu of financial assets traded in the market speculation opportunities are plentiful. Financial wealth is volatile and the endogenous borrowing limits are always active. Variance of the asset returns is amplified. The asset trading volume is substantial and volatile.