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Incomplete Financial Markets and Jumps in Asset Prices

  • Hervé Crès

    (Sciences Po, Paris)

  • Tobias Markeprand

    (Department of Economics, University of Copenhagen)

  • Mich Tvede

    (Department of Economics, University of Copenhagen)

A dynamic pure-exchange general equilibrium model with uncertainty is studied. Fundamentals are supposed to depend continuously on states of nature. It is shown that: 1. if financial markets are complete, then asset prices vary continuously with states of nature, and; 2. if financial markets are incomplete, jumps in asset prices may be unavoidable. Consequently incomplete financial markets may increase volatility in asset prices significantly.

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 09-12.

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Length: 15 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:kud:kuiedp:0912
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  1. Huang, Chi-Fu, 1985. "Information structure and equilibrium asset prices," Journal of Economic Theory, Elsevier, vol. 35(1), pages 33-71, February.
  2. Laurent E. Calvet, 1999. "Incomplete Markets and Volatility," Harvard Institute of Economic Research Working Papers 1865, Harvard - Institute of Economic Research.
  3. Laurent E. Calvet & Adlai J. Fisher, 2006. "Multifrequency Jump-Diffusions: An Equilibrium Approach," NBER Working Papers 12797, National Bureau of Economic Research, Inc.
  4. Torben G. Andersen & Luca Benzoni & Jesper Lund, 2001. "An Empirical Investigation of Continuous-Time Equity Return Models," NBER Working Papers 8510, National Bureau of Economic Research, Inc.
  5. Bewley, Truman F., 1972. "Existence of equilibria in economies with infinitely many commodities," Journal of Economic Theory, Elsevier, vol. 4(3), pages 514-540, June.
  6. Mas-Colell, Andreu & Monteiro, Paulo K., 1996. "Self-fulfilling equilibria: An existence theorem for a general state space," Journal of Mathematical Economics, Elsevier, vol. 26(1), pages 51-62.
  7. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
  8. Alessandro Citanna & Karl Schmedders, 2005. "Excess price volatility and financial innovation," Economic Theory, Springer, vol. 26(3), pages 559-587, October.
  9. Mas-Colell, Andreu, 1991. "Indeterminacy in Incomplete Market Economies," Economic Theory, Springer, vol. 1(1), pages 45-61, January.
  10. Chichilnisky, Graciela & Zhou, Yuqing, 1998. "Smooth infinite economies," Journal of Mathematical Economics, Elsevier, vol. 29(1), pages 27-42, January.
  11. Mas-Colell, Andreu & Zame, William R., 1996. "The existence of security market equilibrium with a non-atomic state space," Journal of Mathematical Economics, Elsevier, vol. 26(1), pages 63-84.
  12. Lim, G. C. & Martin, Vance L. & Teo, Leslie E., 1998. "Endogenous Jumping And Asset Price Dynamics," Macroeconomic Dynamics, Cambridge University Press, vol. 2(02), pages 213-237, June.
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