Speculative Trade under Ambiguity ∗ Jan

Ambiguous beliefs may lead to speculative trade and speculative bubbles. We demonstrate this by showing that the classical Harrison and Kreps (1978) example of speculative trade among agents with heterogeneous beliefs can be replicated with agents having common ambiguous beliefs. More precisely, we show that the same asset prices and pattern of trade can be obtained in equilibrium with agents’ having recursive multiple-prior expected utilities with common set of probabilities. While learning about the true distribution of asset dividends makes speculative bubbles vanish in the long run under heterogeneous beliefs, it may not do so under common ambiguous beliefs. Ambiguity need not disappear with learning over time, and speculative bubbles may persist forever. ∗ Extended abstract.