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Price Revelation and Existence of Financial Equilibrium with Incomplete Markets and Private Beliefs

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  • Lionel DE BOISDEFFRE

Abstract

We consider a pure exchange ?nancial economy, where rational agents, possibly asymmetrically informed, forecast prices privately, with no model of how they are determined. Therefore, agents face both ?exogenous uncertainty?, on the future state of nature, and ?endogenous uncertainty?, on the future price. At a sequential equilibrium, all consumers expect the ?true? price as a possible outcome and elect optimal strategies at the ?rst period, which clear on all markets, ex post. The paper?s purpose is twofold. First, it de?nes no-arbitrage prices, which comprise all equilibrium prices, and displays their revealing properties. Second, it shows, under mild conditions, that a sequential equilibrium always exists in this model, whatever agents?prior beliefs or the ?nancial structure. This outcome suggests that standard existence problems, which followed Hart (1975) and Radner (1979), stem from the rational expectation and perfect foresight assumptions of the classical model.

Suggested Citation

  • Lionel DE BOISDEFFRE, 2015. "Price Revelation and Existence of Financial Equilibrium with Incomplete Markets and Private Beliefs," Working Papers 2014-2015_7, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Mar 2015.
  • Handle: RePEc:tac:wpaper:2014-2015_7
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    File URL: http://gtl.univ-pau.fr/travaux/1911F_2014_2015_7docWCATT_Price_Revelation_Financial_Equilibrium_Incomplete_Markets_Private_Beliefs_LdeBoisdeffre.pdf
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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. Momi, Takeshi, 2001. "Non-existence of equilibrium in an incomplete stock market economy," Journal of Mathematical Economics, Elsevier, vol. 35(1), pages 41-70, February.
    3. Bernard Cornet & Lionel de Boisdeffre, 2009. "Elimination of arbitrage states in asymmetric information models," Post-Print halshs-00441895, HAL.
    4. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-678, May.
    5. Busch, Lutz-Alexander & Govindan, Srihari, 2004. "Robust nonexistence of equilibrium with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 40(6), pages 641-645, September.
    6. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
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    More about this item

    Keywords

    Sequential equilibrium; Temporary equilibrium; Perfect foresignt; Existence; Rational expectations; Financial markets; Asymmectric information; Arbitrage;

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