Non-Existence and Inefficiency of Equilibria with American Options and Convertible Bonds
AbstractWe analyze three different examples of economies with incomplete financial markets. In the first model we consider a bond and a convertible bond, and in the second model a stock and an American put option on the stock. Although there is only one commodity and asset payoffs therefore do not depend on spot prices, we derive robust non-existence of equilibria in both cases. In the last example we consider American call options with normal striking prices. We show that in equilibrium the asstes can never span. The Arrow-Debreu allocation cannot be implemented and the equilibrium is inefficient. This example is also robust.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 286.
Date of creation: Apr 1990
Date of revision:
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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de/index.php?id=517
Other versions of this item:
- Kahn, C.M. & Krasa, S., 1990. "Non-Existence And Inefficiency Of Equilibria With America Options And Convertible Bonds," University of Chicago - Economics Research Center 90-3, Chicago - Economics Research Center.
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