Financial Innovation and Expectations. Endogenous Incompleteness and Real Indeterminacy

Alessandro Citanna () and Antonio Villanacci
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Alessandro Citanna: GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper analyzes an incomplete financial markets model with pricetaking utility-maximizing financial innovators and no-short sales restrictions. It is shown that, given the indeterminacy of the no arbitrage price conjecture of innovators, financial markets can remain incomplete in equilibrium. As a consequence, real indeterminacy of degree at least equal to int (S/2)(S-(S/2)) results, where S is the number of spots in the future. The dimension of innovators' beliefs giving rise to I newly introduced financial assets is I(S-I), with an equal degree of real indeterminacy.

Keywords: Financial Innovation; Expectations; Endogenous Incompleteness; Real Indeterminacy (search for similar items in EconPapers)
Date: 1995
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Published in 1995

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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-00607602

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