Existence of Arrow-Radner Equilibrium with Endogenously Complete Markets under Incomplete Information
Abstract A stochastic pure exchange economy with incomplete information is studied where one risky asset and a locally riskless bond are traded. The underlying risks are described by a k -dimensional Brownian motion with k ⩾2. The Brownian motion is not directly observable. Agents observe only asset prices and dividends. Existence of an Arrow–Radner equilibrium is established. In such an equilibrium, asset prices result such that every informationally feasible consumption plan can be financed by trading in the risky asset and the bond. In this sense, the resulting asset market is complete. Journal of Economic Literature Classification Numbers: G12, G14, D51.