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Stock prices, anticipations and investment in general equilibrium


  • DREZE, Jacques H.

    () (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

  • LACHIRI, Oussama

    () (Centre d'Economie de la Sorbonne, Université Paris 1 Panthéon-Sorbonne, France)

  • MINELLI, Enrico

    () (Dipartimento di Scienze Economiche, Università di Brescia, Italia)


We propose an objective for the firm in a model of production economies extending over time under uncertainty and with incomplete markets. We derive the objective of the firm from the assumption of initial-shareholders efficiency. Each shareholder is assumed to communicate to the firm her marginal valuation of profits at all future events (expressed in terms of initial resources). In defining her own marginal valuation of the firm's profits, a shareholder takes into consideration the direct impact of a change in the value of dividends but also the impact of future dividends on the firm's stock price when she trades shares. To predict the impact on the stock price, she uses a state price process, her price theory. The firm computes its own shadow prices for profits at all date-events by simply adding up the marginal valuations of all its initial shareholders. If no restrictions are placed on individual price theories, the existence of equilibria may require financial constraints on a firm's investment when its shareholders are more optimistic than the market about the profitability of such investment. We then impose that price theories be compatible with the observed equilibrium: they should satisfy a no-arbitrage condition. We show by means of an example that, with incomplete markets and no-short selling constraints, this restriction on price theories is not enough to bring consistency in the individuals' marginal evaluations: a financial constraint on the firm's investment may still be needed to obtain an equilibrium

Suggested Citation

  • DREZE, Jacques H. & LACHIRI, Oussama & MINELLI, Enrico, 2009. "Stock prices, anticipations and investment in general equilibrium," CORE Discussion Papers 2009083, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2009083

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    References listed on IDEAS

    1. Geanakoplos, J. & Magill, M. & Quinzii, M. & Dreze, J., 1990. "Generic inefficiency of stock market equilibrium when markets are incomplete," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 113-151.
    2. Makowski, Louis & Pepall, Lynne, 1985. " Easy Proofs of Unanimity and Optimality without Spanning: A Pedagogical Note," Journal of Finance, American Finance Association, vol. 40(4), pages 1245-1250, September.
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    Cited by:

    1. DEHEZ, Pierre, 2012. "Incomplete-markets economies: the seminal work of Diamond, Drèze and Radner," CORE Discussion Papers 2012029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Jacques Dreze, 2016. "Existence and multiplicity of temporary equilibria under nominal price rigidities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(1), pages 279-298, June.
    3. Volker Britz & P. Herings & Arkadi Predtetchinski, 2013. "A bargaining theory of the firm," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(1), pages 45-75, September.
    4. Martin Meier & Enrico Minelli & Herakles Polemarchakis, 2014. "Competitive markets with private information on both sides," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 257-280, February.
    5. Monica Billio & Roberto Casarin, 2010. "Bayesian Estimation of Stochastic-Transition Markov-Switching Models for Business Cycle Analysis," Working Papers 1002, University of Brescia, Department of Economics.
    6. repec:mje:mjejnl:v:13:y:2017:i:1:p:141-158 is not listed on IDEAS
    7. repec:mje:mjejnl:v:12:y:2017:i:1:p:141-158 is not listed on IDEAS
    8. Britz Volker & Herings Jean-Jacques & Predtetchinski Arkadi, 2010. "Theory of the Firm: Bargaining and Competitive Equilibrium," Research Memorandum 057, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

    More about this item


    general equilibrium; incomplete markets; stock prices; anticipations; investment constraints; arbitrage;

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General
    • P12 - Economic Systems - - Capitalist Systems - - - Capitalist Enterprises

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