Complete and incomplete markets with short-sale constraints |
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Authors: | Eduardo L Giménez |
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Institution: | (1) Departamento de Fundamentos da Análise Económica e Historia e Institucións Económicas, Universidade de Vigo, 36200 Vigo (Galiza), SPAIN (e-mail: egimenez@correo.uvigo.es) , ES |
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Abstract: | 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 |
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Keywords: | and Phrases: Complete markets Incomplete markets Technically incomplete markets Short-Sale constraint |
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