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Belief non-equivalence and financial trade: a comment on a result by Araujo and Sandroni
Abstract

Aloisio Araujo and Alvaro Sandroni have shown in [1] that in a complete-markets economy in which there are no exogenous bounds to financial trade, existence of equilibrium requiresagents with prior beliefs that agree on zero-probability events, and, therefore, with asymptotically homogeneous posteriors. This note illustrates the extent to which the result depends on market completeness: in general, equilibrium requires compatibility of beliefs only up to the revenue transfer opportunities allowed by the market; when the market is sufficiently incomplete, generically on the space of asset returns, even individuals who disagree on zero-probability events meet that "constrained-compatibility" requirement.

Autores:
Carvajal, Andrés; Riascos, Alvaro
Palabras clave:
existence, general equilibrium, heterogeneous beliefs
Archivo:
Año:
2006
Mes:
Julio
Número:
27