On statistical indistinguishability of complete and incomplete market models

Nikolai Dokuchaev

Studies in Economics and Finance, 2021, vol. 38, issue 1, 114-125

Abstract: Purpose - This paper aims to investigate possibility of statistical detection of market completeness for continuous time diffusion stock market models. Design/methodology/approach - The paper uses theory of forecasting to find criteria of predictability of market parameters such as volatilities and the appreciation rates. Findings - It is known that the market completeness is not a robust property: small random deviations of the coefficients convert a complete market model into an incomplete one. The paper shows that market incompleteness is also non-robust: for any incomplete market from a wide class of models, there exists a complete market model with arbitrarily close paths of the stock prices and the market parameters. Originality/value - The paper results lead to a counterintuitive conclusion that the incomplete markets are indistinguishable in the terms of the market statistics.

Keywords: Price statistics; Market completeness; Market incompleteness; Forecasting; C18; C52; C53; G13 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-01-2020-0023

DOI: 10.1108/SEF-01-2020-0023

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