Endogenous Completeness of Diffusion Driven Equilibrium Markets
We study the existence of equilibria with endogenously complete markets in a continuous-time, heterogenous agents economy driven by a multidimensional diffusion process. Our main results show that if prices are real analytic as functions of time and the state variables of the model then a suffi- cient condition for market completeness is that the volatility of dividends be nondegenerate. In contrast to previous research, our formulation does not require that securities pay terminal dividends and thus allows for both finite or infinite horizon economies. We illustrate our results by providing easily applicable conditions for market completeness in two benchmark cases: that where the state variables are given by a vector autoregressive process and that where they are given by a vector of autonomous diffusion processes. We also provide counterexamples which show that real analyticity cannot be dispensed with if one is to deduce dynamic market completeness from the structure of dividends.
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Volume (Year): 80 (2012)
Issue (Month): 3 (05)
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