Minimax price bounds in incomplete markets

This paper develops an approach to tighten the bounds on asset prices in an incomplete market by combining no-arbitrage pricing and preference-based pricing, and the approach is applied to a call option in the absence of dynamic rebalancing. With the no-arbitrage pricing, it is straightforward to obtain the initial bounds, which are too wide to be of practical uses. By accepting that a representative agent exhibits risk aversion from a benchmark pricing kernel, it is possible to narrow the bounds considerably. Using the unbiased minimax deviation implicit in the parameters, one can restrict further the set of reasonable values on assets in incomplete markets.     

Taxes and money in incomplete financial markets

Abstract We analyze a model with incomplete financial markets, where money is needed to pay taxes. Equilibria exist, are typically regular and not Pareto optimal. Moreover, generically, there exists a redistribution of money among households which leads to a Pareto superior equilibrium. The intervention occurs only in the first period and it does not require either closing markets or upper bounds on the number of households. Mathematics Subject Classification (2000): 91B50 Journal of Economic Literature Classification: D52, D60, E50, H20     

Expectations matter: Job prospects and turnover dynamics

This paper presents evidence on the effects of worker expectations on labor turnover, a topic largely ignored in the voluminous literature on labor mobility. Two survey instruments related to expected job duration and chances of promotion in the National Longitudinal Surveys of Youth are used to analyze the role of job prospects in predicting turnover dynamics. The key empirical finding is that workers with favorable job assessments have a lower and flatter tenure-turnover profile—i.e. the well-known negative structural relationship between the turnover rate and job tenure-than their counterparts with less favorable job assessments. This finding is consistent with search-and-matching theories that explicitly incorporate heterogeneity of prior beliefs about match quality.     

Equilibrium in incomplete markets: II : Generic existence in stochastic economies

We model multiperiod securities markets with differential information. A price system that admits no free lunches is related to martingales when agents have rational expectations. We introduce the concept of resolution time, and show that a better informed agent and a less informed agent must agree on the resolution times of commonly marketed events if they have rational expectations and if there are no free lunches. It then follows that if all elementary events are marketed for a less informed agent then any price system that admits no free lunches to a better informed agent must eliminate any private information asymmetry between the two. We provide an example of a dynamically fully revealing price system that is arbitrage free and yields elementarily complete markets.     

Game contingent claims in complete and incomplete markets

A game contingent claim is a contract which enables both the buyer and the seller to terminate it before maturity. For complete markets Kifer [Finance and Stochastics 4 (2000) 443–463] shows a connection to a (zero-sum) Dynkin game whose value is the unique no-arbitrage price of the claim. But, for incomplete markets one needs a more general approach. We interpret the contract as a generalized non-zero-sum stopping game. For the complete case this leads to the same results as in Kifer [Finance and Stochastics 4 (2000) 443–463]. For the general case we show the existence of an equilibrium point under the condition that both the seller and the buyer have an exponential utility function. For other utility functions such a point need not exist in the context of incomplete markets.     

Slack in incomplete markets with nominal assets: A symmetric proof

In this paper, we provide an equilibrium analysis in the framework of incomplete markets where some agents’ preferences are possibly satiated at some state of the nature. We will consider nominal assets with exogenously fixed asset prices. We extend the notion of equilibrium with slack – introduced by Drèze and Müller [Drèze, J., Müller, H., 1980. Optimality properties of rationing schemes. Journal of Economic Theory 23, 150–159] in a fixed price setting – to the GEI framework.     

Bounds for the utility-indifference prices of non-traded assets in incomplete markets

Abstract We consider a special class of financial models with both traded and non-traded assets and show that the utility indifference (bid) price of a contingent claim on a non-traded asset is bounded above by the expectation under the minimal martingale measure. This bound also represents the marginal bid price for the claim. The key conclusion is that the bound and the marginal bid price are independent of both the utility function and initial wealth of the agent. Thus all utility maximising agents charge the same marginal price for the claim. This conclusion is in some sense the opposite conclusion to that of Hubalek and Schachermayer (2001), who show that any price is consistent with some equivalent martingale measure. Mathematics Subject Classification (2000): 91B28, 91B16, 60J70 Journal of Economic Literature Classification: G13     

Notes on pareto improvement in incomplete financial markets

these notes describe some recent developments in the analysis of the possibilities for Pareto improvement when, in a competitive environment, financial markets are incomplete. The basic framework is a general methodology for investigating the welfare effects of policy or institutional changes in equilibrium models, when these can be characterized in terms of perturbing the solutions to a system, of smooth equations. Two particular scenarios are discussed in detail: First, the situation where a central government can intervene in the form of wealth taxes and subsidies, and second, the situation where the financial institutions can be modified by increasing the number of available instruments.

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Sommario Queste osservazioni descrivono alcuni sviluppi recenti dell'analisi del miglioramento paretiano quando, in un contesto competitivo, i mercati finanziari sono incompleti. La struttura di riferimento è la metodologia generale per indagare gli effetti sul benessere sociale di cambiamenti politici o istituzionali nei modelli di equilibrio, quando questi possono essere caratterizzati come una perturbazione delle soluzioni di un sistema di equazioni. Due scenari particolari vengono discussi in dettaglio: nel primo, un governo centrale può intervenire attraverso la tassazione sulla ricchezza e le sovvenzioni; nel secondo, le istituzioni finanziarie possono essere modificate mediante l'aumento degli strumenti disponibili.

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While working in this general area I have benefitted substantially from interaction and collaboration with several of my, sometime Penn colleagues or students, Alex Citanna, Atsushi Kajii, Marcos Lisboa and Antonio Villanacci. Conversations at various points with Ronel Elul, John Geanakoplos, Heracles Polemarchakis and especially, Paolo Siconolfi have also been extremely helpful and illuminating. None of them, however, is responsible for my biases and idiosyncrasies. These notes were prepared for a presentation at the AMASES Conference held in Pugnochiuso, Italy during September 25–28, 1995.     

Equilibrium in incomplete markets: I : A basic model of generic existence

This paper demonstrates the generic existence of general equilibria in incomplete markets. Our economy is a model of two periods, with uncertainty over the state of nature to be revealed in the second period. Securities are claims to commodity bundles in the second period that are contingent on the state of nature, and are insufficient in number to span all state contingent claims to value, regardless of the announced spot commodity prices. Under smooth preference assumptions, equilibria exist except for an exceptional set of endowments and securities, a closed set of measure zero. The paper includes partial results for fixed securities, showing the existence of equilibria except for an exceptional set of endowments.     

Excess demand function around critical prices in incomplete markets

We show that the aggregate excess demand function in an economy with incomplete real asset markets can be characterized by Walras’ law, homogeneity, and continuity around critical prices that cause one-dimensional drop of the dimension of the budget set.     

A simple method for computing equilibria when asset markets are incomplete

The problem of computing equilibria for general equilibrium models with incomplete real asset markets, or GEI models for the sake of brevity, is reconsidered. It is shown here that the rank-dropping behavior of the asset return matrix could be dealt with in rather a simple fashion: We first compute its singular value decomposition, and then, through this decomposition, construct, by the introduction of a homotopy parameter, a new matrix such that it has constant rank before a desired equilibrium is reached. By adjunction of this idea to the homotopy method, a simpler constructive proof is obtained for the generic existence of GEI equilibria. For the purpose of computing these equilibria, from this constructive proof is then derived a path-following algorithm whose performance is finally demonstrated by means of three numerical examples.     

Equilibrium and arbitrage in incomplete asset markets with fixed prices

At arbitrary prices of commodities and assets, fix-price equilibria exist under weak assumptions: endowments need not satisfy an interiority condition, utility functions need only satisfy a very weak monotonicity requirement, and the asset return matrix allows for redundant assets. Prices of assets may permit arbitrage. At equilibrium, though restricted through endogenously determined trading constraints, arbitrage possibilities may persist; in an example, an individual holds an arbitrage portfolio.     

Adaptive learning and distributional dynamics in an incomplete markets model

Recent research shows that several DSGE models provide a closer fit to the data under adaptive learning. This paper extends this research by introducing adaptive learning in the model of Krusell and Smith (1998) with uninsurable idiosyncratic risks and aggregate uncertainty. A first contribution of this paper establishes that the equilibrium of this framework is stable under least-squares learning. The second contribution consists of showing that bounded rationality enhances the ability of this model to match the distribution of income in the US. Learning increases significantly the Gini coefficients because of the opposite effects on consumption of the capital-rich and of the capital-poor agent. The third contribution is an empirical exercise that shows that learning can account for increases in the income Gini coefficient of up to 25% in a period of 28 years. Overall, these findings suggest that adaptive learning has important distributional repercussions in this class of models.     

Agreement toward stability in matching markets

For firms with responsive preferences, we prove that the set of stable matchings unanimously preferred by workers to any firm quasi-stable matching has a lattice structure. This follows from a generalization of the Decomposition Lemma. The result does not hold when firms have q-substitutable preferences. Nevertheless, we show that the set of stable matchings unanimously preferred by workers to a firm quasi-stable matching contains an element which is unanimously least preferred by workers, and most preferred by firms. When a firm quasi-stable matching is fed into our extension of the Deferred Acceptance algorithm (where firms propose), the existence of this matching guarantees the success of the algorithm.     

Optimal monetary policy under incomplete markets and aggregate uncertainty: A long-run perspective

This paper examines the role of monetary policy in an environment with aggregate risk and incomplete markets. In a two-period overlapping-generations model with aggregate uncertainty, optimal monetary policy attains the ex-ante Pareto optimal allocation. This policy aims to stabilize the savings rate in the economy by changing real returns of nominal bonds via variation in expected inflation. Optimal expected inflation is procylical and on average higher than without uncertainty. Simple inflation targeting rules closely approximate the optimal monetary policy.     

The relation between sunspot effects and multiplicity in incomplete markets models with numeraire assets

This paper considers the necessity and sufficiency of multiple certainty equilibria for sunspot effects, and shows that neither implication is valid. This claim is made for models with incomplete markets and numeraire assets. First, I prove that a multiplicity of certainty equilibria is neither necessary nor sufficient for sunspot effects by way of two counter-examples. Second, I verify over an entire subset of economies that equilibrium with sunspot effects can never be characterized as a randomization over multiple certainty equilibria.     

Production and hedging in futures markets with multiple delivery specifications

This paper examines the behavior of the competitive firm under price uncertainty. To hedge the price risk, the firm trades unbiased commodity futures contracts with multiple delivery specifications from which delivery risk prevails. We show that the firm optimally produces less in the presence than in the absence of the delivery risk. We show further that the concept of expectation dependence that describes how the delivery risk is correlated with the random spot price plays a pivotal role in determining the firm’s optimal futures position. Specifically, an under-hedge is optimal if the random spot price is positively expectation dependent on the delivery risk. The firm’s optimal futures position becomes indeterminate if the random spot price is negatively expectation dependent on the delivery risk.     

外资银行2004:风景这边独好

中国内地市场:外资银行的心仪之地 　　如果我们用“风起云涌“这四个字来形容2003年的外资银行大陆抢滩,应该说是十分贴切的.因为无论是中国经济快速发展的强大吸引力,或是从已在中国开业的外资银行的业绩来说,中国的金融市场都是值得国外金融家们瞩目的地方.……     

State-owned enterprises' political capital,city administrative rank and economic resources acquisition: Empirical evidence from Chinese capital markets

This paper examines the impact of Chinese State-Owned Enterprises' (SOE) corporate political capital and the administrative rank of the city where the firm is located on their ability to acquire economic resources. The study found that the stronger the political capital owned by SOEs and the higher the administrative rank of the cities in which SOEs were located, the easier it was for them to obtain more loans and subsidies. We also found that as the city administrative rank increased, the positive effect of SOEs' political capital on economic resources acquisition also increased. When SOEs were divided into commercial competitive versus specific functional enterprises, the administrative rank of the city in which the enterprise was located played a significant positive role in obtaining economic resources for commercial competitive enterprises, while the role of their political capital played a limited role. For specific functional enterprises, their own political capital played the more significant positive role. This paper expands the research scope of corporate political connections with a new perspective.