On the Existence of Competitive Equilibrium in Frictionless and Incomplete Stochastic Asset
21 Pages Posted: 21 Oct 2015
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.
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