Price revelation and existence of equilibrium in a private belief economy

Lionel de Boisdeffre ()
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Lionel de Boisdeffre: CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour, 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 rational agents, possibly asymmetrically informed, forecast prices privately and, therefore, face "exogenous uncertainty", on the future state of nature, and "endogenous uncertainty" on future prices. 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 ex post. We introduce no-arbitrage prices and display their revealing properties. Under mild conditions, we show that a sequential equilibrium exists, whatever the financial structure and agents' private information or beliefs. This result suggests that existence problems of standard sequential equilibrium models, following Hart (1975) or Radner (1979), stem from the rational expectation and perfect foresight assumptions, which are both dropped in our model.

Keywords: sequential equilibrium; temporary equilibrium; perfect foresight; existence; rational expectations; financial markets; information; inferences; asymmetric information; arbitrage; équilibre séquentiel; équilibre temporaire; anticipations parfaites; anticipations rationnelles; marchés financiers; information asymétrique (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-cta and nep-mic
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Published in 2013

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