Question
Consider a finance economy with T = L = 1 and S = J = 3, where the security payoff matrix is given by Z
Consider a finance economy with T = L = 1 and S = J = 3, where the security payoff matrix is given by Z = 2 1 2 2 2 3 0 3 3 (Recall that rows correspond to states and columns to securities.) (a) Are markets complete or incomplete and why? (b) What are the payoffs of the following two portfolios: a = (1/3,1/3, 0)^T and a' = (1/6, 1/3, 0)^T (c) Is it possible that at an equilibrium the security prices are given by p = (p1; p2; p3) = (1; 1; 2)? (d) Do the three Arrow-Debreu securities and the risk-free asset (which pays 1 in each state) lie in the asset span?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started