Optimists and pessimists in (in)complete markets

Nicole Branger, Patrick Konermann and Christian Schlag

No 252, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We study the effects of market incompleteness on speculation, investor survival, and asset pricing moments, when investors disagree about the likelihood of jumps and have recursive preferences. We consider two models. In a model with jumps in aggregate consumption, incompleteness barely matters, since the consumption claim resembles an insurance product against jump risk and effectively reproduces approximate spanning. In a long-run risk model with jumps in the long-run growth rate, market incompleteness affects speculation, and investor survival. Jump and diffusive risks are more balanced regarding their importance and, therefore, the consumption claim cannot reproduce approximate spanning.

Keywords: market (in)completeness; heterogeneous beliefs; jumps in the longrungrowth rate; jumps in aggregate consumption; recursive preferences (search for similar items in EconPapers)
JEL-codes: D51 D52 G12 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:252

DOI: 10.2139/ssrn.2356502

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