Arbitrage and price revelation with private beliefs

Lionel de Boisdeffre ()
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Lionel de Boisdeffre: Centre d'Economie de la Sorbonne, https://centredeconomiesorbonne.cnrs.fr

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: We extend the Cornet-de Boisdeffre (2002-2009) asymmetric information finite dimensional model to a more general setting, where agents may forecast prices with some private uncertainty. This new model drops both Radner's (1972-1979) classical, but restrictive, assumptions of rational expectations and perfect foresight. It deals with sequential financial equilibrium, when agents, unaware of how equilibrium prices or quantities are determined, are prone to uncertainty between - possibly uncountable - forecasts. Under perfect foresight, the extended model coincides with Cornet-de Boisdeffre's (2002-2009). Yet, when anticipations are private, we argue any element of a typically uncountable ‘minimum uncertainty set’ may prevail as an equilibrium price tomorrow. This outcome is inconsistent with perfect foresight and appeals for a broader definition of sequential equilibrium, which we propose hereafter. By standard techniques, we embed and extend Cornet-de Boisdeffre's (2002-2009) results, to the infinite dimensional model. The aim is to lay foundations for another paper, showing that the concept of sequential equilibrium we propose may solve the classical existence problems of the perfect foresight model, following Hart (1974)

Keywords: Sequential equilibrium; temporary equilibrium; perfect foresight; expectations; incomplete markets; asymmetric information; arbitrage (search for similar items in EconPapers)
JEL-codes: D52 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2012-07
New Economics Papers: this item is included in nep-cta
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:12053

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