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Incomplete financial markets and jumps in asset prices

Lookup NU author(s): Professor Mich Tvede

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND).

Abstract

For incomplete financial markets jumps in both prices and consumption can be unavoidable. We consider pure-exchange economies with infinite horizon, discrete time, uncertainty with a continuum of possible shocks at every date. The evolution of shocks follows a Markov process and fundamentals depend continuously on shocks. It is shown: (1) equilibria exist; (2) for effectively complete financial markets asset prices depend continuously on shocks; and, (3) for incomplete financial markets there is an open set of economies U such that for every equilibrium of every economy in U, asset prices at every date depend discontinuously on the shock at that date.

Publication metadata

Author(s): Cres H, Markeprand T, Tvede M

Publication type: Article

Publication status: Published

Journal: Economic Theory

Year: 2016

Volume: 62

Issue: 1

Pages: 201-219

Print publication date: 01/06/2016

Online publication date: 20/05/2015

Acceptance date: 07/05/2015

Date deposited: 08/05/2015

ISSN (print): 0938-2259

ISSN (electronic): 1432-0479

Publisher: Springer

URL: http://dx.doi.org/10.1007/s00199-015-0884-9

DOI: 10.1007/s00199-015-0884-9

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