Price uncertainty and the existence of financial equilibrium
AbstractWe 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 InfoPaper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 11016.
Length: 23 pages
Date of creation: Mar 2011
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Sequential equilibrium; temporary equilibrium; perfect foresight; expectations; incomplete markets; asymmetric information; arbitrage; existence proof.;
Find related papers by JEL classification:
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-30 (All new papers)
- NEP-CBA-2011-04-30 (Central Banking)
- NEP-CTA-2011-04-30 (Contract Theory & Applications)
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