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Does Market Incompleteness Matter?

  • David K. Levine

    ()

    (University of California at Los Angeles)

  • William R. Zame

    ()

    (University of California at Los Angeles, Los Angeles)

This paper argues that incompleteness of intertemporal financial markets has little effect (on welfare, prices, or consumption) in an economy with a single consumption good, provided that traders are long-lived and patient, a riskless bond is traded, shocks are transitory, and there is no aggregate risk. In an economy with aggregate risk, a similar conclusion holds, provided traders share the same CRRA utility function and the right assets are traded. Examples demonstrate that these conclusions need not hold if the wrong assets are traded or if the economy has multiple consumption goods. Copyright The Econometric Society 2002.

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 70 (2002)
Issue (Month): 5 (September)
Pages: 1805-1839

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Handle: RePEc:ecm:emetrp:v:70:y:2002:i:5:p:1805-1839
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  1. Magill, M. & Quinzii, M., 1992. "Infinite Horizon Incomplete Markets," DELTA Working Papers 92-26, DELTA (Ecole normale supérieure).
  2. Laurent E. Calvet, 1999. "Incomplete Markets and Volatility," Harvard Institute of Economic Research Working Papers 1865, Harvard - Institute of Economic Research.
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  9. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-91, May.
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  14. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-87, June.
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  16. Constantinides,George & Duffie,Darrel, 1992. "Asset pricing with heterogeneous consumers," Discussion Paper Serie A 381, University of Bonn, Germany.
  17. Yaari, Menahem E., 1976. "A law of large numbers in the theory of consumer's choice under uncertainty," Journal of Economic Theory, Elsevier, vol. 12(2), pages 202-217, April.
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