Incomplete Markets

Abstract

In reality, markets are incomplete, meaning that some payoffs cannot be replicated by trading in marketed securities. The classic no-arbitrage theory of valuation in a complete market, based on the unique price of a self-financing replicating portfolio, is not adequate for nonreplicable payoffs in incomplete markets. We focus on pricing over-the-counter derivative securities, surveying many proposed methodologies, drawing relationships between them, and evaluating their promise.

A three-period extension of the CAPM

“…The feasibility of c* means that in a finance economy (a single commodity model) when the financial markets clear, the demand for the commodity induced by the portfolio-holdings equals its supply in each state; thus the commodity market clears in each state (Magill and Quinzii, 1996).…”

“…Proof. The proof is given in (Magill and Quinzii, 1996). The following additional assumptions will be made throughout this section:…”

Untitled

“…Consequently, the models of the market, elaborated the changes of production and consumption in time, were also constructed. Some of the results, the reader can find in Radner (1970), Chiang (1992), Aliprantis (1996), Panek (1997), Malawski (2001), Magill, Quinzii (2002), Malawski (2005), Malawski, Woerter (2006), Panek (2006).…”

Equilibrium in Economy with Linear Production Sets

“…Later, Panek (1997) presented dynamic versions of the models considered in (Panek 1993), as well as discussed the stability of the state of equilibrium in a competitive economy. Magill and Quinzii (2002) studied the effects of trade with the sequential and incomplete market structure. In this situation, a perfect allocation of resources is impossible.…”