Optimists and Pessimists in (In)Complete Markets

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

SAFE Working Paper No. 252

55 Pages Posted: 18 Nov 2013 Last revised: 25 Jun 2019

See all articles by Nicole Branger

Nicole Branger

University of Muenster - Finance Center Muenster

Patrick Konermann

BI Norwegian Business School

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Date Written: June 6, 2019

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, since 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.

Keywords: Market (in)completeness, heterogeneous beliefs, jumps in the long-run growth rate, jumps in aggregate consumption, recursive preferences

JEL Classification: D51, D52, G12

Suggested Citation

Branger, Nicole and Konermann, Patrick and Schlag, Christian, Optimists and Pessimists in (In)Complete Markets (June 6, 2019). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming; SAFE Working Paper No. 252. Available at SSRN: https://ssrn.com/abstract=2356502 or http://dx.doi.org/10.2139/ssrn.2356502

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Patrick Konermann (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Christian Schlag

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

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