Equilibrium in economies with incomplete financial markets

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Abstract

This paper analyses an exchange economy in the absence of Arrow-Debreu complete markets. It is assumed that trading takes place in the sequence of spot markets and futures markets for securities payable in units of account. Unlimited short-selling in securities is allowed. A general equilibrium in such an economy is a set of current and future prices (contingent on uncertain events) and a set of individual plans such that all markets are cleared. The existence of such an equilibrium is proved under usual assumptions. This is in contrast to the case of futures markets for contingent futures commodities where an equilibrium may not exist. The optimality of equilibrium allocations is also discussed.

Original languageEnglish (US)
Pages (from-to)110-119
Number of pages10
JournalJournal of Economic Theory
Volume36
Issue number1
DOIs
StatePublished - Jun 1985

Bibliographical note

Funding Information:
* After completing this work I have learned that David Cass has obtained similar results in the paper “Competitive equilibrium with incomplete financial markets,” CARESS Working Paper No. 84-09, University of Pennsylvania. t I would like to thank Professor Martin Hellwig for helpful discussions. Financial support from Stiftung Volkswagenwerk is gratefully acknowledged.

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