On ambiguity-averse market equilibrium

Niklas Vespermann*, Thomas Hamacher, Jalal Kazempour

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

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Abstract

We develop a Nash equilibrium problem representing a perfectly competitive market wherein all players are subject to the same source of uncertainty with an unknown probability distribution. Each player—depending on her individual access to and confidence over empirical data—builds an ambiguity set containing a family of potential probability distributions describing the uncertain event. The ambiguity set of different players is not necessarily identical, yielding a market with potentially heterogeneous ambiguity aversion. Built upon recent developments in the field of Wasserstein distributionally robust chance-constrained optimization, each ambiguity-averse player maximizes her own expected payoff under the worst-case probability distribution within her ambiguity set. Using an affine policy and a conditional value-at-risk approximation of chance constraints, we define a tractable Nash game. We prove that under certain conditions a unique Nash equilibrium point exists, which coincides with the solution of a single optimization problem. Numerical results indicate that players with comparatively lower consumption utility are highly exposed to rival ambiguity aversion.
Original languageEnglish
JournalOptimization Letters
Volume17
Pages (from-to)1379-1412
Number of pages34
ISSN1862-4472
DOIs
Publication statusPublished - 2023

Keywords

  • Distributionally robust equilibrium problem
  • Nash game
  • Wasserstein ambiguity set
  • Heterogeneous ambiguity aversion

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