Risk sharing and retrading in incomplete markets

Abstract

At a competitive equilibrium of an incomplete-markets economy agents' marginal valuations for the tradable assets are equalized ex-ante. We characterize the finest partition of the state space conditional on which this equality holds for any economy. This leads naturally to a necessary and sufficient condition on information that would lead to retrade, if such information were to become publicly available after the initial round of trade.Journal of Economic Literature Classification Numbers: D52, D80.

Value of Information in Competitive Economies With Incomplete Markets

“…In particular, it implies that generically an increase in information generates additional gains from trade, so that agents would trade again if asset markets were to reopen after the increase in information. This idea is developed more fully in Gottardi and Rahi (), which provides several extensions of Theorem in the specific context of retrading after the arrival of information. However, Theorem suffices for our present purpose, which is to contrast welfare changes in equilibrium to those that can be achieved by a planner.…”

Informed Trading and Intertemporal Substitution

“…In Bond and Eraslan (2010), the value of a security depends on the buyer's action, while buyers take actions only after the trade. Many explanations proposed for rational trading are based on market incompleteness (Blume, Coury, and Easley (2006), Gottardi and Rahi (2013), Lubensky and Smith (2016)). Blume, Coury, and Easley (2006) examine trading when the market is incomplete with respect to endowment shocks.…”