General Equilibrium Foundations of Finance Structure of Incomplete M
The purpose of this book is to give a sound economic foundation of finance. Finance is a coherent branch of applied economics that is designed to understand financial markets in order to give advice for practical financial decisions. This book argues that
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THEORY AND DECISION LffiRARY General Editors: W. Leinfellner (Vienna) and G. Eberlein (Munich) Series A: Philosophy and Methodology of the Social Sciences Series B: Mathematical and Statistical Methods Series C: Game Theory, Mathematical Programming and Operations Research Series D: System Theory, Knowledge Engineering an Problem Solving
SERIES C: GAME THEORY, MATHEMATICAL PROGRAMMING AND OPERATIONS RESEARCH VOLUME 33
Editor-in Chief H. Peters (Maastricht University); Honorary Editor: S.H. Tijs (Tilburg); Editorial Board: E.E.C. van Damme (Tilburg), H. Keiding (Copenhagen), J.-F. Mertens (Louvain-Ia-Neuve), H. Moulin (Rice University), S. Muto (Tokyo University), T. Parthasarathy (New Delhi), B. Peleg (Jerusalem), T. E. S. Raghavan (Chicago), J. Rosenmiiller (Bielefeld), A. Roth (Pittsburgh), D. Schmeidler (Tel-Aviv), R. Selten (Bonn), W. Thomson (Rochester, NY). Scope: Particular attention is paid in this series to game theory and operations research, their formal aspects and their applications to economic, political and social sciences as well as to sociobiology. It will encourage high standards in the application of game-theoretical methods to individual and social decision making.
The titles published in this series are listed at the end of this volume.
GENERAL EQUILIBRIUM FOUNDATIONS OF FINANCE Structure of Incomplete Markets Models by
THORSTEN HENS University a/Zurich, Switzerland and Norwegian Business School, Norway
and
BEATE PILGRIM Reuters AG, Frankfurt, Germany
SPRINGER-SCIENCE+BUSINESS MEDIA, B.V.
A C.I.P. Catalogue record for this book is available from the Library of Congress.
ISBN 978-1-4419-5333-9 ISBN 978-1-4757-5317-2 (eBook) DOI 10.1007/978-1-4757-5317-2
Printed on acid-free paper
AII Rights Reserved © 2002 Springer Science+Business Media Dordrecht Originally published by Kluwer Academic Publishers in 2002 Softcover reprint of the hardcover 1st edition 2002 No part of this work may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, microfilming, recording or otherwise, without written permission from the Publisher, with the exception of any material supplied specificalIy for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work.
To Britta and Jerome
Contents
List of Figures Preface Acknowledgments Introduction
Part I
Xl
xiii XVll
xix
The General Equilibrium Model with Incomplete Markets
l. THE MODEL AND SOME FUNDAMENTALS I
2
Information Structure And Commodity Space Consumer Characteristics Expected Utility Hypothesis
2.1 3
Market Structure Payoff Matrix Budget Set
3.1 3.2 4
5 6 7
3 3 4 8 12 12 13
Competitive Equilibria and No-Arbitage Financial Markets Equilibrium Concept 4.1 No-Arbitrage Condition 4.2 Walras Law in the First Period 4.3 Fundamental Theorem of Asset Pricing 4.4 4.5 Asset Pricing Theories 4.6 No-Arbitrage Equilibrium Concept Dual concepts of excess demand Pricing of Derivatives Efficiency of GEl-equilibria
2. EXISTE
