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Existence of financial equilibrium with differential information: the no-arbitrage characterization

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  • Lionel De Boisdeffre

    (Centre d'Economie de la Sorbonne & CATT - Université de Pau)

Abstract

In the classical approach to asymmetric information, agents are all endowed with a price model à la Radner (Econometrica 47: 655-678, 1979). That is, they are assumed to know exactly how equilibrium prices are determined and would only infer information from markets with reference to that price model. Radner (1979) showed that, under asymmetric information, equilibrium only existed generically in this setting. We now drop that so-called "rational expectation" assumption and study the existence of financial equilibrium when assets are numeraire. We show the existence of equilibrium is, then, characterized by the no-arbitrage condition on financial markets, as in De Boisdeffre (Econ Theory 31: 255-269, 2007), where assets are nominal. This result extends Geanakoplos-Polemarchakis' (Essays in Honor of K.J. Arrow, Starr & Starrett ed., Cambridge UP Vol. 3, 65-96, 1986) to the case of asymmetric information. Contrasting with Radner's, it shows that asymmetric and asymmetric information economies can be treated as two applications of a same model, where they share similar properties

Suggested Citation

  • Lionel De Boisdeffre, 2016. "Existence of financial equilibrium with differential information: the no-arbitrage characterization," Documents de travail du Centre d'Economie de la Sorbonne 16025, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    • Handle: RePEc:mse:cesdoc:16025
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    File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2016/16025.pdf
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    References listed on IDEAS

    as
    1. Bernard Cornet & Lionel Boisdeffre, 2009. "Elimination of arbitrage states in asymmetric information models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(2), pages 287-293, February.
    2. Geanakoplos, J. & Polemarchakis, H., 1985. "Existence,regularity, and constrained suboptimality of competitive allocations when the asset market is incomplete," LIDAM Discussion Papers CORE 1985037, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-678, May.
    4. Bernard Cornet & Lionel Boisdeffre, 2009. "Elimination of arbitrage states in asymmetric information models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(2), pages 287-293, February.
    5. Cornet, Bernard & De Boisdeffre, Lionel, 2002. "Arbitrage and price revelation with asymmetric information and incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 38(4), pages 393-410, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    general equilibrium; asymmetric information; arbitrage; existence;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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