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Imperfect Information Leads to Complete Markets if Dividends are Diffusions

Author

Listed:
  • Frank Riedel

    (Humboldt University)

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.

Suggested Citation

  • Frank Riedel, 1998. "Imperfect Information Leads to Complete Markets if Dividends are Diffusions," Finance 9808002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:9808002
    Note: Type of Document - pdf-file; prepared on PC-TEX; pages: 28
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Complete Markets; General Equilibrium; Imperfect Information; Asset Pricing;
    All these keywords.

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • G1 - Financial Economics - - General Financial Markets

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