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Construction of a state space for interrelated securities with an application to temporary equilibrium theory (*)

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  • Philippe Henrotte

    (Groupe HEC, Departement Finance et Economie, F-78351 Jouy-en-Josas Cedex, FRANCE)

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    Abstract

    We construct an endogenous state space in an exchange economy with possibly infinite horizon. Every period agents trade securities whose payoffs depend on future dividends and asset prices. We reject the perfect foresight assumption on the ground that agents have not only limited knowledge of other individuals' endowments and preferences, but also limited capacity to compute equilibria. We choose instead absence of arbitrage as the principle which allows agents to determine if a system of future prices is possible. We give an alogrithm to compute the set of nonarbitrage prices every period, with both finite and infinite horizon. We then apply this endogenous structure of uncertainty to an infinite horizon temporary equilibrium model.

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    Bibliographic Info

    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 8 (1996)
    Issue (Month): 3 ()
    Pages: 423-459

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    Handle: RePEc:spr:joecth:v:8:y:1996:i:3:p:423-459

    Note: Received: June 21, 1995; revised version January 30, 1996
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    Cited by:
    1. Charalambos Aliprantis & Donald J. Brown & Werner, J., 1997. "Incomplete Derivative Markets and Portfolio Insurance," Cowles Foundation Discussion Papers 1126R, Cowles Foundation for Research in Economics, Yale University.
    2. Aliprantis, C. D. & Brown, D. J. & Werner, J., 2000. "Minimum-cost portfolio insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1703-1719, October.
    3. Mordecai Kurz, 1997. "Social States of Belief and the Determinants of the Equity Risk Premium in A Rational Belief Equilibrium," Working Papers 97026, Stanford University, Department of Economics.

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