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Incomplete Financial Markets and Jumps in Asset Prices

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Author Info
Hervé Crès (Sciences Po, Paris)
Tobias Markeprand (Department of Economics, University of Copenhagen)
Mich Tvede (Department of Economics, University of Copenhagen)

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Abstract

A dynamic pure-exchange general equilibrium model with uncertainty is studied. Fundamentals are supposed to depend continuously on states of nature. It is shown that: 1. if financial markets are complete, then asset prices vary continuously with states of nature, and; 2. if financial markets are incomplete, jumps in asset prices may be unavoidable. Consequently incomplete financial markets may increase volatility in asset prices significantly.

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File URL: http://www.econ.ku.dk/english/research/publications/wp/dp_2009/0912.pdf/
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Publisher Info
Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 09-12.

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Length: 15 pages
Date of creation: Jun 2009
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Handle: RePEc:kud:kuiedp:0912

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Related research
Keywords: general equilibrium; financial markets; jumps in asset prices;

Find related papers by JEL classification:
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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This page was last updated on 2009-11-30.

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