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Imperfect Information Leads to Complete Markets if Dividends are Diffusions


  • Frank Riedel

    (Humboldt University)


A pure exchange economy with a financial market is studied where aggregate dividends are modeled as a diffusion. The dynamics of the diffusion are allowed to depend on factors which are unobservable to the agents and have to be estimated. With perfect information, the asset market would be incomplete because there are more factors than traded assets. Imperfect information reduces the number of observable risks, but also the number of admissible portfolio strategies. It is shown that, as long as the observable dividend stream is a diffusion, the asset market is complete. It is therefore possible to establish the existence of an equilibrium with dynamically complete markets that leads to the same allocation as the Arrow-Debreu equilibrium.

Suggested Citation

  • Frank Riedel, 1998. "Imperfect Information Leads to Complete Markets if Dividends are Diffusions," Finance 9808002, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:9808002
    Note: Type of Document - pdf-file; prepared on PC-TEX; pages: 28

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    References listed on IDEAS

    1. Duffie, Darrell & Zame, William, 1989. "The Consumption-Based Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 57(6), pages 1279-1297, November.
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    3. Feldman, David, 1989. " The Term Structure of Interest Rates in a Partially Observable Econom y," Journal of Finance, American Finance Association, vol. 44(3), pages 789-812, July.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    5. 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.
    6. Mas-Colell, Andreu & Zame, William R., 1991. "Equilibrium theory in infinite dimensional spaces," Handbook of Mathematical Economics,in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 34, pages 1835-1898 Elsevier.
    7. Aliprantis, Charalambos D., 1997. "Separable utility functions," Journal of Mathematical Economics, Elsevier, vol. 28(4), pages 415-444, November.
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    More about this item


    Complete Markets; General Equilibrium; Imperfect Information; Asset Pricing;

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • G1 - Financial Economics - - General Financial Markets

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