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Complete and incomplete financial markets in multi-good economies

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  • Ehling, Paul
  • Heyerdahl-Larsen, Christian

Abstract

We investigate conditions for endogenous incompleteness and completeness in continuous-time financial markets driven by diffusion processes with multiple consumption goods and heterogeneous agents. We show that for a class of utility functions the financial market is endogenously incomplete. A sufficient condition for market completeness is that the dividend diffusion matrix in units of the numeraire good is invertible. Further, financial market completeness can depend on the choice of the numeraire good since changing the numeraire good implies a change of the risk-free asset and the asset structure.

Suggested Citation

  • Ehling, Paul & Heyerdahl-Larsen, Christian, 2015. "Complete and incomplete financial markets in multi-good economies," Journal of Economic Theory, Elsevier, vol. 160(C), pages 438-462.
    • Handle: RePEc:eee:jetheo:v:160:y:2015:i:c:p:438-462
    DOI: 10.1016/j.jet.2015.10.006
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    2. Patrick Beissner & Frank Riedel, 2018. "Non-implementability of Arrow–Debreu equilibria by continuous trading under volatility uncertainty," Finance and Stochastics, Springer, vol. 22(3), pages 603-620, July.
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    4. Puru Gupta & Saul D. Jacka, 2023. "Portfolio Choice In Dynamic Thin Markets: Merton Meets Cournot," Papers 2309.16047, arXiv.org.
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    More about this item

    Keywords

    Multi-good economies; Financial market incompleteness; Financial market completeness;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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