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Financial Innovation and Expectations. Endogenous Incompleteness and Real Indeterminacy

Author

Listed:
  • Alessandro Citanna

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Antonio Villanacci

Abstract

This paper analyzes an incomplete financial markets model with pricetaking utility-maximizing financial innovators and no-short sales restrictions. It is shown that, given the indeterminacy of the no arbitrage price conjecture of innovators, financial markets can remain incomplete in equilibrium. As a consequence, real indeterminacy of degree at least equal to int (S/2)(S-(S/2)) results, where S is the number of spots in the future. The dimension of innovators' beliefs giving rise to I newly introduced financial assets is I(S-I), with an equal degree of real indeterminacy.

Suggested Citation

  • Alessandro Citanna & Antonio Villanacci, 1995. "Financial Innovation and Expectations. Endogenous Incompleteness and Real Indeterminacy," Working Papers hal-00607602, HAL.
    • Handle: RePEc:hal:wpaper:hal-00607602
    as

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