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Price uncertainty and the existence of financial equilibrium

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  • Lionel De Boisdeffre

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne)

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    Abstract

    We consider a pure exchange economy, with incomplete financial markets, where agents face an "exogenous uncertainty", on the future state of nature and an "endogenous uncertainty", on the future price in each random state. Namely, every agents forms price anticipations on each spot market, distributed along an idiosyncratic probability law. At a sequential equilibrium, all agents expect the "true" price as a possible outcome and elect optimal strategies at the first period, which clear on all markets at every time period. We show that, provided the endogenous uncertainty is large enough, a sequential equilibrium exists under standard conditions, for all types of financial structures (i.e., with real, nominal and mixed assets). This result suggests that standard existence problems of sequential equilibrium models, following Hart (1975), stem form the single price expectation assumption.

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    Bibliographic Info

    Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00587701.

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    Date of creation: Oct 2011
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    Handle: RePEc:hal:cesptp:halshs-00587701

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    Related research

    Keywords: General equilibrium; incomplete markets; existence of equilibrium; anticipations.;

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