On the existence of financial equilibrium when beliefs are private

Lionel de Boisdeffre ()
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Lionel de Boisdeffre: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique

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Abstract: We consider a pure exchange financial economy, where agents, possibly asymetrically informed, face an "exogenous uncertainty", on the future state of nature, and an "endogenous uncertainty", on the future price in each random state. Namely, every agent forms private price anticipations on every prospective market, distributed along an idiosyncratic probability law. At a sequential equilibrium, all agents expect the "true" price as a possible outcome and elect optimal strategies at the first period, which clear on all markets at every time period. We show that, provided the endogenous uncertainty is large enough, a sequential equilibrium exists under standard conditions for all types of financial structures and information signals across agents. This result suggests that standard existence problems of sequential equilibrium models, following Hart (1975), stem from the perfect foresight assumption.

Keywords: Sequential equilibrium; temporary equilibrium; perfect foresight; existence; rational expectation; financial markets; asymmetric information; arbitrage.; Equilibre séquentiel; arbitrage; anticipations parfaites ou rationnelles; marchés incomplets; asymétries d'information; inférences; croyances. (search for similar items in EconPapers)
Date: 2012-09
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Published in 2012

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