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Imperfect Information Leads to Complete Markets if Dividends are Diffusions

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Author Info
Frank Riedel (Humboldt University)

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Abstract

A pure exchange economy with a financial market is studied where aggregate dividends are modeled as a diffusion. The dynamics of the diffusion are allowed to depend on factors which are unobservable to the agents and have to be estimated. With perfect information, the asset market would be incomplete because there are more factors than traded assets. Imperfect information reduces the number of observable risks, but also the number of admissible portfolio strategies. It is shown that, as long as the observable dividend stream is a diffusion, the asset market is complete. It is therefore possible to establish the existence of an equilibrium with dynamically complete markets that leads to the same allocation as the Arrow-Debreu equilibrium.

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File URL: http://129.3.20.41/eps/fin/papers/9808/9808002.pdf
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Publisher Info
Paper provided by EconWPA in its series Finance with number 9808002.

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Length: 28 pages
Date of creation: 05 Aug 1998
Date of revision:
Handle: RePEc:wpa:wuwpfi:9808002

Note: Type of Document - pdf-file; prepared on PC-TEX; pages: 28
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Web page: http://129.3.20.41

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Related research
Keywords: Complete Markets; General Equilibrium; Imperfect Information; Asset Pricing;

Find related papers by JEL classification:
D5 - Microeconomics - - General Equilibrium and Disequilibrium
G1 - Financial Economics - - General Financial Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Feldman, David, 1989. " The Term Structure of Interest Rates in a Partially Observable Econom y," Journal of Finance, American Finance Association, vol. 44(3), pages 789-812, July. [Downloadable!] (restricted)
  2. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March. [Downloadable!] (restricted)
  3. Duffie, Darrell & Zame, William, 1989. "The Consumption-Based Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 57(6), pages 1279-97, November. [Downloadable!] (restricted)
    Other versions:
  4. Mas-Colell, Andreu & Zame, William R., 1991. "Equilibrium theory in infinite dimensional spaces," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 34, pages 1835-1898 Elsevier. [Downloadable!] (restricted)
  5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  6. Aliprantis, Charalambos D., 1997. "Separable utility functions," Journal of Mathematical Economics, Elsevier, vol. 28(4), pages 415-444, November. [Downloadable!] (restricted)
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