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Dynamic Allocation and Pricing in Incomplete Markets: A Survey

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  • Saito, Makoto

    (Osaka U)

Abstract

This paper surveys the recent development of empirical and theoretical researches on incomplete markets, pointing out the following aspects. First, the theoretical study in this field is motivated by empirical findings of both asset pricing anomalies and heterogeneous behavior among economic agents. Second, incomplete insurance combined with either borrowing constraints or transaction costs offers predictions consistent with empirical findings. In addition, the failure of insuring persistent or permanent shocks alone yields empirically reasonable predictions. Third, recent theoretical research has made attempts to endogenize incomplete insurance from first principles. Fourth, incomplete markets may make aggregate shocks distributed disproportionately among agents, thereby having a significant impact on dynamic allocation and pricing. Finally the theoretical research into incomplete markets triggers a reassessment of welfare implications as to business cycles, economic growth, and financial integration.

Suggested Citation

  • Saito, Makoto, 1999. "Dynamic Allocation and Pricing in Incomplete Markets: A Survey," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(1), pages 45-75, May.
  • Handle: RePEc:ime:imemes:v:17:y:1999:i:1:p:45-75
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    References listed on IDEAS

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    Cited by:

    1. Yasuyuki Sawada & Satoshi Shimizutani, 2005. "Are People Insured Against Natural Disasters? Evidence from the Great Hanshin-Awaji (Kobe) Earthquake in 1995," CARF F-Series CARF-F-019, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    2. Masakatsu Okubo, 2011. "The Intertemporal Elasticity of Substitution: An Analysis Based on Japanese Data," Economica, London School of Economics and Political Science, vol. 78(310), pages 367-390, April.
    3. Yasuyuki Sawada, 2007. "The impact of natural and manmade disasters on household welfare," Agricultural Economics, International Association of Agricultural Economists, vol. 37(s1), pages 59-73, December.
    4. Malcolm Edey & Luci Ellis, 2002. "Implications of declining government debt for financial markets and monetary operations in Australia," BIS Papers chapters,in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 25-42 Bank for International Settlements.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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