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Incomplete Markets And Short-Sales Constraints: An Equilibrium Approach

Author

Listed:
  • A. BIZID

    (CERMSEM-Université Paris I and CDC IXIS-Capital Markets, 56, rue de Lille, 75007 Paris, France)

  • E. JOUINI

    (Université de Paris 9 Dauphine and CREST, Place du Maréchal de Lattre de Tassigny, 75116 Paris, France)

Abstract

We consider a general discrete-time dynamic financial market with three assets: a riskless bond, a security and a derivative. The market is incomplete (a priori) and at equilibrium. We assume also that the agents of the economy have short-sales constraints on the stock and that the payoff at the expiry of the derivative asset is a monotone function of the underlying security price. The derivative price process is not identifiedex ante. This leads the agents to act as if there were no market for this asset at the intermediary dates. Using some nice properties of the pricing probabilities, which are admissible at the equilibrium, we prove that it suffices to consider the subset of the risk-neutral probabilities that overestimate the low values of the security and underestimate its high values with respect to the true probability. This approach greatly reduces the interval of admissible prices for the derivative asset with respect to no-arbitrage, as showed numerically.

Suggested Citation

  • A. Bizid & E. Jouini, 2001. "Incomplete Markets And Short-Sales Constraints: An Equilibrium Approach," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 4(02), pages 211-243.
    • Handle: RePEc:wsi:ijtafx:v:04:y:2001:i:02:n:s0219024901000936
    DOI: 10.1142/S0219024901000936
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    Cited by:

    1. Traian A. Pirvu & Huayue Zhang, 2012. "A Multi Period Equilibrium Pricing Model," Papers 1205.6193, arXiv.org.
    2. Alet Roux, 2007. "The fundamental theorem of asset pricing under proportional transaction costs," Papers 0710.2758, arXiv.org.

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