IMPLEMENTING ARROW-DEBREU EQUILIBRIA BY CONTINUOUS TRADING OF FEW LONG-LIVED SECURITIES

Darrell Duffie and Chi-Fu Huang

Chapter 4 in Theory of Valuation, 2005, pp 97-127 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractA two-period (0 and T) Arrow-Debreu economy is set up with a general model of uncertainty. We suppose that an equilibrium exists for this economy. The Arrow-Debreu economy is placed in a Radner (dynamic) setting; agents may trade claims at any time during [0, T]. Under appropriate conditions it is possible to implement the original Arrow-Debreu equilibrium, which may have an infinite-dimensional commodity space, in a Radner equilibrium with only a finite number of securities. This is done by opening the “right” set of security markets, a set which effectively completes markets for the Radner economy.

Keywords: Asset Pricing; Financial Theory; Valuation; Term Structure; Interest Rates; Options; Portfolios; Taxes; Transaction Costs (search for similar items in EconPapers)
Date: 2005
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Related works:
Journal Article: Implementing Arrow-Debreu Equilibria by Continuous Trading of Few Long-lived Securities (1985)
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