Incomplete financial markets and jumps in asset prices

Hervé Crès, Tobias Markeprand () and Mich Tvede ()
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Tobias Markeprand: DREAM
Mich Tvede: Newcastle University

Economic Theory, 2016, vol. 62, issue 1, No 9, 219 pages

Abstract: Abstract For incomplete financial markets, jumps in both prices and consumption can be unavoidable. We consider pure-exchange economies with infinite horizon, discrete time, uncertainty with a continuum of possible shocks at every date. The evolution of shocks follows a Markov process, and fundamentals depend continuously on shocks. It is shown that: (1) equilibria exist; (2) for effectively complete financial markets, asset prices depend continuously on shocks; and (3) for incomplete financial markets, there is an open set of economies $${\fancyscript{U}}$$ U such that for every equilibrium of every economy in $${\fancyscript{U}}$$ U , asset prices at every date depend discontinuously on the shock at that date.

Keywords: Financial markets; General equilibrium; Jumps in asset prices; D52; D53; E32; G11; G12 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Incomplete Financial Markets and Jumps in Asset Prices (2009)
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DOI: 10.1007/s00199-015-0884-9

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