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Incomplete Financial Markets and Jumps in Asset Prices

Author

Listed:
  • Hervé Crès

    (Sciences Po, Paris)

  • Tobias Markeprand

    (Department of Economics, University of Copenhagen)

  • Mich Tvede

    (Department of Economics, University of Copenhagen)

Abstract

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.

Suggested Citation

  • Hervé Crès & Tobias Markeprand & Mich Tvede, 2009. "Incomplete Financial Markets and Jumps in Asset Prices," Discussion Papers 09-12, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:0912
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    File URL: http://www.econ.ku.dk/english/research/publications/wp/dp_2009/0912.pdf/
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    References listed on IDEAS

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    1. Mas-Colell, Andreu, 1991. "Indeterminacy in Incomplete Market Economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 1(1), pages 45-61, January.
    2. Calvet, Laurent E., 2001. "Incomplete Markets and Volatility," Journal of Economic Theory, Elsevier, vol. 98(2), pages 295-338, June.
    3. Calvet, Laurent E. & Fisher, Adlai J., 2008. "Multifrequency jump-diffusions: An equilibrium approach," Journal of Mathematical Economics, Elsevier, vol. 44(2), pages 207-226, January.
    4. Torben G. Andersen & Luca Benzoni & Jesper Lund, 2002. "An Empirical Investigation of Continuous-Time Equity Return Models," Journal of Finance, American Finance Association, vol. 57(3), pages 1239-1284, June.
    5. Alessandro Citanna & Karl Schmedders, 2005. "Excess price volatility and financial innovation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(3), pages 559-587, October.
    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. 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.
    8. 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.
    9. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
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    Citations

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    Cited by:

    1. Covarrubias, Enrique, 2013. "The number of equilibria of smooth infinite economies," Journal of Mathematical Economics, Elsevier, vol. 49(4), pages 263-265.
    2. Covarrubias, Enrique, 2011. "The equilibrium set of economies with a continuous consumption space," Journal of Mathematical Economics, Elsevier, vol. 47(2), pages 137-142, March.
    3. Covarrubias Enrique, 2010. "Regular Infinite Economies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-21, July.
    4. Zaier Aouani & Bernard Cornet, 2017. "Eliminating useless portfolios in constrained financial economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(1), pages 159-190, January.

    More about this item

    Keywords

    general equilibrium; financial markets; jumps in asset prices;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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