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On statistical indistinguishability of complete and incomplete market models

Author

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  • Nikolai Dokuchaev

Abstract

Purpose - This paper aims to investigate possibility of statistical detection of market completeness for continuous time diffusion stock market models. Design/methodology/approach - The paper uses theory of forecasting to find criteria of predictability of market parameters such as volatilities and the appreciation rates. Findings - It is known that the market completeness is not a robust property: small random deviations of the coefficients convert a complete market model into an incomplete one. The paper shows that market incompleteness is also non-robust: for any incomplete market from a wide class of models, there exists a complete market model with arbitrarily close paths of the stock prices and the market parameters. Originality/value - The paper results lead to a counterintuitive conclusion that the incomplete markets are indistinguishable in the terms of the market statistics.

Suggested Citation

  • Nikolai Dokuchaev, 2021. "On statistical indistinguishability of complete and incomplete market models," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 38(1), pages 114-125, February.
    • Handle: RePEc:eme:sefpps:sef-01-2020-0023
    DOI: 10.1108/SEF-01-2020-0023
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    Cited by:

    1. Nikolai Dokuchaev, 2023. "On statistical indistinguishability of complete and incomplete discrete time market models," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 46(2), pages 461-475, December.

    More about this item

    Keywords

    Price statistics; Market completeness; Market incompleteness; Forecasting; C18; C52; C53; G13;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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