Non-implementability of Arrow–Debreu equilibria by continuous trading under volatility uncertainty

Patrick Beissner and Frank Riedel
Additional contact information
Patrick Beissner: Australian National University

Finance and Stochastics, 2018, vol. 22, issue 3, No 3, 603-620

Abstract: Abstract In diffusion models, a few suitably chosen financial securities allow to complete the market. As a consequence, the efficient allocations of static Arrow–Debreu equilibria can be attained in Radner equilibria by dynamic trading. We show that this celebrated result generically fails if there is Knightian uncertainty about volatility. A Radner equilibrium with the same efficient allocation as in an Arrow–Debreu equilibrium exists if and only if the discounted net trades of the equilibrium allocation display no ambiguity in the mean. This property is violated generically in endowments, and thus Arrow–Debreu equilibrium allocations are generically unattainable by dynamically trading a few long-lived assets.

Keywords: Knightian uncertainty; Ambiguity; General equilibrium; Asset pricing; Radner equilibrium; 91B51; 91G80 (search for similar items in EconPapers)
JEL-codes: C61 D81 G1 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1007/s00780-018-0362-x Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:finsto:v:22:y:2018:i:3:d:10.1007_s00780-018-0362-x

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

DOI: 10.1007/s00780-018-0362-x

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().