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Arbitrage and price revelation with private beliefs

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  • Lionel de Boisdeffre

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

We extend the Cornet-de Boisdeffre (2002-2009) asymmetric information finite dimensional model to a more general setting, where agents may forecast prices with some private uncertainty. This new model drops both Radner's (1972-1979) classical, but restrictive, assumptions of rational expectations and perfect foresight. It deals with sequential financial equilibrium, when agents, unaware of how equilibrium prices or quantities are determined, are prone to uncertainty between - possibly uncountable - forecasts. Under perfect foresight, the extended model coincides with Cornet-de Boisdeffre's (2002-2009). Yet, when anticipations are private, we argue any element of a typically uncountable 'minimum uncertainty set' may prevail as an equilibrium price tomorrow. This outcome is inconsistent with perfect foresight and appeals for a broader definition of sequential equilibrium, which we propose hereafter. By standard techniques, we embed and extend Cornet-de Boisdeffre's (2002-2009) results, to the infinite dimensional model. The aim is to lay foundations for another paper, showing that the concept of sequential equilibrium we propose may solve the classical existence problems of the perfect foresight model, following Hart (1974).

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  • Lionel de Boisdeffre, 2012. "Arbitrage and price revelation with private beliefs," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00722035, HAL.
    • Handle: RePEc:hal:cesptp:halshs-00722035
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00722035
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    References listed on IDEAS

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    1. Bernard Cornet & Lionel Boisdeffre, 2009. "Elimination of arbitrage states in asymmetric information models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(2), pages 287-293, February.
    2. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-678, May.
    3. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
    4. Hart, Oliver D., 1974. "On the existence of equilibrium in a securities model," Journal of Economic Theory, Elsevier, vol. 9(3), pages 293-311, November.
    5. Grandmont, Jean-Michel, 1993. "Temporary general equilibrium theory," Handbook of Mathematical Economics, in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 19, pages 879-922, Elsevier.
    6. Cornet, Bernard & De Boisdeffre, Lionel, 2002. "Arbitrage and price revelation with asymmetric information and incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 38(4), pages 393-410, December.
    7. Green, Jerry R, 1973. "Temporary General Equilibrium in a Sequential Trading Model with Spot and Futures Transactions," Econometrica, Econometric Society, vol. 41(6), pages 1103-1123, November.
    8. Hammond, Peter J., 1983. "Overlapping expectations and Hart's conditions for equilibrium in a securities model," Journal of Economic Theory, Elsevier, vol. 31(1), pages 170-175, October.
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