On the Existence of Competitive Equilibrium in Frictionless and Incomplete Stochastic Asset

21 Pages Posted: 21 Oct 2015

See all articles by Robert A. Jarrow

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: October 20, 2015

Abstract

Using a standard frictionless, continuous time, and continuous trading stochastic economy with heterogeneous beliefs, the purpose of this paper is to provide sufficient conditions for the existence of competitive equilibrium in an incomplete asset market. A new approach to proving existence is provided, which is readily generalized to markets with frictions, including trading constraints and transaction costs. As a second contribution, this paper also proves the existence of bubble equilibrium in a market without trading constraints. We show that bubbles can exist solely due heterogeneous beliefs about the evolution of an asset’s market price process.

Suggested Citation

Jarrow, Robert A., On the Existence of Competitive Equilibrium in Frictionless and Incomplete Stochastic Asset (October 20, 2015). Available at SSRN: https://ssrn.com/abstract=2676656 or http://dx.doi.org/10.2139/ssrn.2676656

Robert A. Jarrow (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

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