V.F. Martins-da-Rocha (CEREMADE) L. Triki (CERMSEM)
Abstract
We consider an exchange economy under incomplete financial markets with purely financial securities and finitely many agents. When portfolios are not constrained, Cass (1984), Duffie (1987) and Florenzano--Gourdel (1992) proved that arbitrage-free security prices fully characterize equilibrium security prices. This result is based on a trick initiated by Cass (1984) in which one unconstrained agent behaves as if he were in complete markets. This approach is unsatisfactory since it is asymmetric and no more valid when every agent is subject to frictions. We propose a new and symmetric approach to prove that arbitrage-free security prices still fully characterize equilibrium security prices in the more realistic situation where the financial market is constrained by convex restrictions, provided that financial markets are collectively frictionless.
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Paper provided by EconWPA in its series Microeconomics with number
0503013.
Find related papers by JEL classification: C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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