SFB 303 Discussion Paper No. A - 286
Author: Kahn, Charles M., and Stefan Krasa
Title: Non-Existence and Inefficiency of Equilibria with American Options
and Convertible Bonds
Abstract: We analyze three different examples of economies with incomplete
financial markets. In the first model we consider a bond and a
convertible bond, and in the second model a stock and an American put
option on the stock. Although there is only one commodity and asset
payoffs therefore do not depend on spot prices, we derive robust
non-existence of equilibria in both cases. In the last example we
consider American call options with normal striking prices. We show
that in equilibrium the asstes can never span. The Arrow-Debreu
allocation cannot be implemented and the equilibrium is inefficient.
This example is also robust.
Creation-Date: April 1990
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