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Complete and Incomplete Markets with Short-Sale Constraints

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  • Eduardo L. Giménez

    (Universidade de Vigo)

Abstract

This paper argues that the introduction of a short-sale constraint in the Arrow-Radner frameworkinvalidates standard definitions of complete and incomplete markets. In this constrained set-up,two threshold values with familiar properties arise.The case of a zero short-sale bound set on some security fulfills the standard definition of"incomplete" financial markets. Beyond a particular level of the short-sale bound financial marketsare "complete", since the short-sale constraint is not active.For intermediate bounds the distinction between complete and incomplete financial markets isblurred. Although some technical definitions hold, agents can not fully transfer wealth amongstates. These intermediate cases, called "technically incomplete markets", exhibit interestingwelfare properties. For instance, the resulting equilibrium allocations may not be Pareto dominatedby those of the non-restricted complete markets equilibrium.

Suggested Citation

  • Eduardo L. Giménez, 2001. "Complete and Incomplete Markets with Short-Sale Constraints," Tinbergen Institute Discussion Papers 01-034/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20010034
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    References listed on IDEAS

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    1. LeRoy,Stephen F. & Werner,Jan, 2014. "Principles of Financial Economics," Cambridge Books, Cambridge University Press, number 9781107024120, February.
    2. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
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    Cited by:

    1. Chevallier, Claire Océane & El Joueidi, Sarah, 2019. "Capital regulation and banking bubbles," Journal of Mathematical Economics, Elsevier, vol. 84(C), pages 117-129.
    2. Motolese, Maurizio & Nakata, Hiroyuki, 2024. "Are macroeconomic indices fool's gold?," Journal of Economic Behavior & Organization, Elsevier, vol. 217(C), pages 240-260.
    3. Eduardo Giménez, 2007. "On the positive fundamental value of money with short-sale constraints," Annals of Finance, Springer, vol. 3(4), pages 455-469, October.
    4. Araujo, Aloisio & Páscoa, Mário R. & Torres-Martínez, Juan Pablo, 2011. "Long-lived collateralized assets and bubbles," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 260-271.
    5. Hiroyuki Nakata, 2013. "Welfare effects of short-sale constraints under heterogeneous beliefs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 53(2), pages 283-314, June.
    6. Francesc Obiols-Homs, 2011. "On borrowing limits and welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 279-294, April.

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    More about this item

    Keywords

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    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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