Stock prices, anticipations and investment in general equilibrium
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
|Date of creation:||01 Dec 2009|
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- John Geanakoplos & Michael Magill & Martine Quinzii & J. Dreze, 1988.
"Generic Inefficiency of Stock Market Equilibrium When Markets Are Incomplete,"
Cowles Foundation Discussion Papers
863, Cowles Foundation for Research in Economics, Yale University.
- 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.
- Geanakoplos, J. & Magill, M. & Quinzii, M. & Dreze, J., "undated". "Generic inefficiency of stock market equilibrium when markets are incomplete," CORE Discussion Papers RP 916, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- 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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