SFB 303 Discussion Paper No. A - 230
Author: Krasa, Stefan, and Jan Werner
Title: Equilibria with Options: Existence and Indeterminacy
Abstract: This paper studies an economy in which trading takes place in spot
commodity markets and incomplete futures markets for assets of various
types. There are real assets (stocks or commodity futures), options on real
assets, and a riskless nominal bond. We show that for a generic set of
economies parametrized by consumers' endowments and structure of real
assets, there exists an equilibrium. Moreover, we show that, generically,
the set of equilibrium allocations of commodities contains a manifold of a
high demension. Even if the market structure is potentially complete (i.e.
the number of assets, including options, equals or exceeds the number of
states of nature) and the Arrow-Debreu equilibrium can be achieved through
sequential trading in spot and futures markets, there are multiple
(inefficient) equilibria without full rank of the asset payoff matrix.
Keywords: Existence of equilibrium, Real indeterminacy of equilibria commodity market,
Future market, Consumers endowments
Creation-Date: February 1989
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