Arbitrage and price revelation with asymmetric information and incomplete markets

This paper deals with the issue of arbitrage with differential information and incomplete financial markets, with a focus on information that no-arbitrage asset prices can reveal. Time and uncertainty are represented by two periods and a finite set S of states of nature, one of which will prevail at the second period. Agents may operate limited financial transfers across periods and states via finitely many nominal assets. Each agent i has a private information about which state will prevail at the second period; this information is represented by a subset S_i of S. Agents receive no wrong information in the sense that the “true state” belongs to the “pooled information” set ∩_iS_i, hence assumed to be non-empty.Our analysis is two-fold. We first extend the classical symmetric information analysis to the asymmetric setting, via a concept of no-arbitrage price. Second, we study how such no-arbitrage prices convey information to agents in a decentralized way. The main difference between the symmetric and the asymmetric settings stems from the fact that a classical no-arbitrage asset price (common to every agent) always exists in the first case, but no longer in the asymmetric one, thus allowing arbitrage opportunities. This is the main reason why agents may need to refine their information up to an information structure which precludes arbitrage.     

Counting combinatorial choice rules

I count the number of combinatorial choice rules that satisfy certain properties: Kelso–Crawford substitutability, and independence of irrelevant alternatives. The results are important for two-sided matching theory, where agents are modeled by combinatorial choice rules with these properties. The rules are a small, and asymptotically vanishing, fraction of all choice rules. But they are still exponentially more than the preference relations over individual agents—which has positive implications for the Gale–Shapley algorithm of matching theory.     

Complete and incomplete markets with short-sale constraints

Summary. This paper argues that the introduction of a short-sale constraint in the Arrow-Radner framework invalidates standard definitions of complete and incomplete markets. Two threshold values with familiar properties arise in this constrained set-up. If short sales are not allowed on some security, then financial markets will be incomplete in the standard sense. Beyond a particular level of the short-sale bound, financial markets are “complete”, since the short-sale constraint is not effective. For intermediate bounds the distinction between complete and incomplete financial markets is blurred. Although some technical definitions hold, agents can not fully transfer wealth among states. These intermediate cases, called “technically incomplete markets”, exhibit interesting welfare properties. For instance, the resulting equilibrium allocations may not be Pareto-dominated by those of the non-restricted complete markets equilibrium. Received: November 28, 2000; / revised version: November 9, 2001     

Information, trade and incomplete markets

The no-trade result of Milgrom and Stokey, J Econ Theory 26:17–27 (1982), states that if rational traders begin with an ex-ante Pareto optimal allocation then the arrival of information cannot generate trade. This paper allows traders to trade before and after the arrival of information. If there are enough securities to hedge against all payoff relevant risk, then the preinformation-arrival allocation is Pareto optimal and information arrival has no effect. This no-retrade result is the competitive analog of the no-trade result of (1982). However, information generically generates trade when markets are state-contingent incomplete.We thank seminar participants at Cambridge, Carnegie Mellon,Cornell, Essex, London, Maastricht, USC, and York and participants at the 2003 SITE, the 2003 SAET and the Fall 2002 Cornell–Penn State Macro Conference. We also thank Karl Shell and a referee for this journal for useful comments     

Inflation in Open Economies with Complete Markets

This paper uses an overlapping generations model to analyze monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of a complete set of real securities. Each central bank is able to commit to the contingent monetary policy rule that maximizes domestic welfare. In an attempt to improve their country’s terms of trade of securities, central banks choose to commit to costly inflation in favorable states of nature. In equilibrium the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may therefore gain from monetary cooperation.     

The Commons with Capital Markets

We explore a dynamic commons problem and assess the welfare consequences of access to capital markets. The commons has a high intrinsic rate of return but its fruits cannot be secured by individual agents. Capital market access allows resources to be held securely and intertemporally transferred, but at a lower rate of return. In a two period model, we completely characterise symmetric consumption and extraction behaviour in four environments: under a strategic and a competitive equilibrium concept, and with and without market access. Strategic equilibria dominate competitive ones: while agents disagree over how to divide the resource, all would prefer it to be larger; the strategic concept allows them to anticipate returns to their conservation. As the number of agents becomes infinite, the strategic outcome converges to the competitive; as the number of agents falls to one, it converges to the planner’s. Market access has a positive effect on welfare owing to its consumption and extraction smoothing properties and a negative effect owing to its creation of an outside option to the commons, encouraging its depletion. A sufficient condition for autarky to dominate market access for some levels of communal endowment is that the world market discount factor exceed the subjective discount factor. Multiple equilibria may arise: these result from market access, not the equilibrium concept. The authors thank Ralph Bailey, Siddhartha Bandyopadhyay, Matthew Cole, Carl Devore, Felix Kubler, Chirantan Ganguly, Martin Jensen, Indrajit Ray, Celine Rochon, Dave Rusin, participants at the Royal Economic Society 2005 and an anonymous referee for valuable comments. They are grateful for funding under the ESRC’s World Economy and Finance programme (RES-156-25-0022).     

Two-sided Markets,Competitive Bottlenecks and Exclusive Contracts

We provide a framework for analyzing two-sided markets that allows for different degrees of product differentiation on each side of the market. When platforms are viewed as homogenous by sellers but heterogeneous by buyers, we show that “competitive bottlenecks” arise endogenously. In equilibrium, platforms do not compete directly for sellers, instead choosing to compete indirectly by subsidizing buyers to join. Sellers are left with none of the gains from trade. Despite this, it is sellers who choose to purchase from multiple platforms (multihome). Finally, the role of exclusive contracts to prevent multihoming is explored. We are very grateful to Jose Miguel Abito for research assistance, and to the editor and a referee for helpful comments.     

水市场失灵及其防范

用水市场来配置水资源是一种高效的水资源配置方式，但由于受水市场外部性、水资源公共产品属性以及传统文化和地方习俗等因素的影响．会产生失灵市场现象。通过加强和改善国家对水资源的宏观管理和加强对水市场的宏观调控、加大社会基础设施建设力度、建立和完善水权法律制度等．能够减少水市场失灵带来的水资源配置的低效．提高我国水资源利用水平和利用效率。     

Futures markets,price stabilization and efficient exploitation of exhaustible resources

Markets for natural resource futures contracts and cash forward contracts experience a rapid growth. According to theory, this should result in more efficient resource depletion, implying that price formation is more consistent with Hotelling's rule. The rationale of this stabilization effect is briefly discussed. Next, we analyze the impact of expanding futures markets on the behaviour of individual resource owners trading on the cash market. Using a simple pulse extraction model, we demonstrate that the expected time of depletion can shift to the present or the future, and that utility of exploitation can go up or down, as market prices are stabilized.     

Dynamic linkages between exchange rates and stock prices: Evidence from East Asian markets

This study examines dynamic linkages between exchange rates and stock prices for seven East Asian countries, including Hong Kong, Japan, Korea, Malaysia, Singapore, Taiwan, and Thailand, for the period January 1988 to October 1998. Our empirical results show a significant causal relation from exchange rates to stock prices for Hong Kong, Japan, Malaysia, and Thailand before the 1997 Asian financial crisis. We also find a causal relation from the equity market to the foreign exchange market for Hong Kong, Korea, and Singapore. Further, while no country shows a significant causality from stock prices to exchange rates during the Asian crisis, a causal relation from exchange rates to stock prices is found for all countries except Malaysia. Our findings are robust with respect to various testing methods used, including Granger causality tests, a variance decomposition analysis, and an impulse response analysis. Our findings also indicate that the linkages vary across economies with respect to exchange rate regimes, the trade size, the degree of capital control, and the size of equity market.