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On the irrelevance of financial policy under market incompleteness and trading constraints

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  • Atesagaoglu, Orhan Erem
  • Carceles-Poveda, Eva

Abstract

We study the Modigliani and Miller Theorem under portfolio constraints. We show that there exist state-dependent trading limits under which financial policy is irrelevant. In addition, a no short-selling constraint on equity is innocuous in spite of being state-independent.

Suggested Citation

  • Atesagaoglu, Orhan Erem & Carceles-Poveda, Eva, 2015. "On the irrelevance of financial policy under market incompleteness and trading constraints," Economics Letters, Elsevier, vol. 136(C), pages 125-128.
    • Handle: RePEc:eee:ecolet:v:136:y:2015:i:c:p:125-128
    DOI: 10.1016/j.econlet.2015.09.007
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    References listed on IDEAS

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    1. Gottardi, Piero, 1995. "An Analysis of the Conditions for the Validity of Modigliani-Miller Theorem with Incomplete Markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(2), pages 191-207, March.
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    4. Yann Algan & Olivier Allais & Eva Carceles-Poveda, 2009. "Macroeconomic implications of financial policy," SciencePo Working papers Main hal-03596477, HAL.
    5. Stiglitz, Joseph E, 1969. "A Re-Examination of the Modigliani-Miller Theorem," American Economic Review, American Economic Association, vol. 59(5), pages 784-793, December.
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    8. DeMarzo, Peter M., 1988. "An extension of the Modigliani-Miller theorem to stochastic economies with incomplete markets and interdependent securities," Journal of Economic Theory, Elsevier, vol. 45(2), pages 353-369, August.
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    More about this item

    Keywords

    Financial policy; Incomplete markets; Trading constraints;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • G1 - Financial Economics - - General Financial Markets

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