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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