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Optimists and Pessimists in (In)Complete Markets

Published online by Cambridge University Press:  06 September 2019

Nicole Branger
Affiliation:
Branger, [email protected], University of Muenster
Patrick Konermann*
Affiliation:
Konermann, [email protected], BI Norwegian Business School
Christian Schlag
Affiliation:
Schlag, [email protected], Goethe University and Research Center SAFE
*
Konermann (corresponding author), [email protected]

Abstract

We study the effects of market incompleteness on speculation, investor survival, and asset pricing moments when investors disagree about the likelihood of jumps and have recursive preferences. We consider two models. In a model with jumps in aggregate consumption, incompleteness barely matters because the consumption claim resembles an insurance product against jump risk and effectively reproduces approximate spanning. In a long-run risk model with jumps in the long-run growth rate, market incompleteness affects speculation and investor survival. Jump and diffusive risks are more balanced regarding their importance, and therefore the consumption claim cannot reproduce approximate spanning.

Type
Research Article
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We would like to thank an anonymous referee for many helpful comments and suggestions, which greatly improved the article. Furthermore, we are grateful for the input provided by seminar participants at Goethe University Frankfurt, the University of Muenster, and BI Norwegian Business School as well as the participants of the 13th Colloquium on Financial Markets, the 17th Conference of the Swiss Society for Financial Market Research (SGF), the Arne Ryde Workshop in Financial Economics 2014, the 2016 meeting of the German Academic Association for Business Research (VHB), the 2017 North American Winter Meeting of the Econometric Society, and the 2018 SITE Asset Pricing Theory and Computation Workshop. Special thanks go to Hengjie Ai, Laurent Calvet, Paul Ehling, Alessandro Graniero, Holger Kraft, Christoph Meinerding, Miguel Palacios, Jacob Sagi, and Costas Xiouros. Supplementary Material for this article is available at http://home.bi.no/patrick.konermann. Schlag gratefully acknowledges research and financial support from SAFE, funded by the State of Hessen initiative for research LOEWE.

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