General Incomplete-Market Equilibria in Continuous Time

The paper develops the continuous-time (infinite state space) counterpart of the discrete-time general incomplete-market equilibrium model from (Dumas and Lyasoff, 2012). It is shown that the main conclusions from (DL) carry... [ view full abstract ]

The paper develops the continuous-time (infinite state space) counterpart of the discrete-time general incomplete-market equilibrium model from (Dumas and Lyasoff, 2012). It is shown that the main conclusions from (DL) carry over to the infinite dimensional case: the requirements that all market participants can solve their investment-consumption problems, that their individual pricing measures produce identical prices for all traded streams of stochastic payoffs, and the markets clear, generate the same number of restrictions as there are degrees of freedom in fixing the equilibrium (choice of asset prices, consumption plans, and investment strategies) – regardless of the degree of market incompleteness.