Financial market structures revealed by pricing rules: Efficient complete markets are prevalent

Aloisio Araujo, Alain Chateauneuf and José Heleno Faro
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Aloisio Araujo: IMPA - Instituto Nacional de Matemática Pura e Aplicada, FGV - Fundacao Getulio Vargas [Rio de Janeiro]
José Heleno Faro: Instituto de Ensino e Pesquisa (Brazil) - Insper Institute of Education and Research

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: It is well known that when an arbitrage-free financial market is incomplete or has tradable financial assets with frictions there must be multiple risk-neutral probability measures. The main motivation for the present study is to elucidate what type of market structure usually emerges from pricing rules. First, we obtain that finitely generated pricing rules, characterized by polytopes of probabilities, capture the class of all finite arbitrage-free financial markets that are potentially incomplete or subject to frictions affecting tradable assets. Next, we provide a novel characterization of efficient securities and introduce related notions of market completeness that underlies pricing rules. Our main result shows that the class of efficient complete markets with bid-ask spreads is the prevalent case revealed by finitely generated pricing rules.

Keywords: Efficiency; Pricing rules; Risk-neutral probabilities; Bid-ask spreads; Complete markets; Incompleteness (search for similar items in EconPapers)
Date: 2018-01
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Citations: View citations in EconPapers (11)

Published in Journal of Economic Theory, 2018, 173, pp.257-288. ⟨10.1016/j.jet.2017.11.002⟩

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Journal Article: Financial market structures revealed by pricing rules: Efficient complete markets are prevalent (2018)
Working Paper: Financial market structures revealed by pricing rules: Efficient complete markets are prevalent (2018)
Working Paper: Financial market structures revealed by pricing rules: Efficient complete markets are prevalent (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-03252242

DOI: 10.1016/j.jet.2017.11.002

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