Price revelation and existence of financial equilibrium with incomplete markets and private beliefs

Lionel de Boisdeffre ()
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Lionel de Boisdeffre: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour

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Abstract: We consider a pure exchange financial 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 first period, which clear on all markets ex post. The paper's purpose is twofold. First, it defines 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 financial structure. This outcome suggests that standard existence problems, which followed Hart [1975] and Radner [1979], stem from the national expectation and perfect foresight assumptions of the classical model.

Keywords: sequential equilibrium; temporary equilibrium; perfect foresight; rational expectations; financial markets; asymmetric information; équilibre séquentiel; équilibre temporaire; anticipations parfaites; existence; anticipations rationnelles; marchés financiers; information asymétrique; arbitrage (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-hpe
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01164142v1
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Published in 2015

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-01164142

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