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Financial market structures revealed by pricing rules: Efficient complete markets are prevalent

Author

Listed:
  • Aloisio Araujo

    (IMPA - Instituto Nacional de Matemática Pura e Aplicada, FGV - Fundacao Getulio Vargas [Rio de Janeiro])

  • Alain Chateauneuf

    (IPAG Business School, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • José Heleno Faro

    (Instituto de Ensino e Pesquisa (Brazil) - Insper Institute of Education and Research)

Abstract

It is well known that when an arbitrage-free financial market is incomplete or has tradable financial assets with frictions there must be multiple risk-neutral probability measures. The main motivation for the present study is to elucidate what type of market structure usually emerges from pricing rules. First, we obtain that finitely generated pricing rules, characterized by polytopes of probabilities, capture the class of all finite arbitrage-free financial markets that are potentially incomplete or subject to frictions affecting tradable assets. Next, we provide a novel characterization of efficient securities and introduce related notions of market completeness that underlies pricing rules. Our main result shows that the class of efficient complete markets with bid-ask spreads is the prevalent case revealed by finitely generated pricing rules.

Suggested Citation

  • Aloisio Araujo & Alain Chateauneuf & José Heleno Faro, 2018. "Financial market structures revealed by pricing rules: Efficient complete markets are prevalent," Post-Print hal-03252242, HAL.
    • Handle: RePEc:hal:journl:hal-03252242
    DOI: 10.1016/j.jet.2017.11.002
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    Cited by:

    1. Antoine Billot & Sujoy Mukerji & Jean-Marc Tallon, 2020. "Market Allocations under Ambiguity: A Survey," Revue économique, Presses de Sciences-Po, vol. 71(2), pages 267-282.
    2. Alain Chateauneuf & Bernard Cornet, 2022. "Submodular financial markets with frictions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(2), pages 721-744, April.
    3. Marcello Basili & Alain Chateauneuf & Giuseppe Scianna, 2019. "A consistent representation of Keynes’s long-term expectation in ?nancial market," Department of Economics University of Siena 808, Department of Economics, University of Siena.
    4. Lorenzo Bastianello & Alain Chateauneuf & Bernard Cornet, 2022. "Put-Call Parities, absence of arbitrage opportunities and non-linear pricing rules," Papers 2203.16292, arXiv.org.
    5. Matteo Burzoni & Frank Riedel & H. Mete Soner, 2021. "Viability and Arbitrage Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 89(3), pages 1207-1234, May.
    6. Marcello Basili & Carlo Zappia, 2018. "Ellsberg’s Decision Rules and Keynes’s Long-Term Expectations," Department of Economics University of Siena 777, Department of Economics, University of Siena.
    7. Lin Zhang & Yuehua Xu & Honghui Chen, 2022. "Do Returnee Executives Value Corporate Philanthropy? Evidence from China," Journal of Business Ethics, Springer, vol. 179(2), pages 411-430, August.
    8. Marcello Basili & Alain Chateauneuf & Giuliano Antonio & Giuseppe Scianna, 2023. "A representation of Keynes's long-term expectation in financial markets," Working Papers hal-03999320, HAL.
    9. Lécuyer, Emy & Riedel, Frank & Stanca, Lorenzo, 2024. "Arbitrage Pricing in Convex, Cash-Additive Markets," Center for Mathematical Economics Working Papers 694, Center for Mathematical Economics, Bielefeld University.

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    More about this item

    Keywords

    Efficiency; Pricing rules; Risk-neutral probabilities; Bid-ask spreads; Complete markets; Incompleteness;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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