Optimists and Pessimists in (In)Complete Markets

Branger Nicole, Konermann Patrick, Schlag Christian


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
Epstein-Zin utility; long-run risk; heterogeneous beliefs; market incompleteness; disagreement



Publication type
Research article (journal)

Peer reviewed
Yes

Publication status
Published

Year
2020

Journal
Journal of Financial and Quantitative Analysis

Volume
55

Issue
8

Start page
2466

End page
2499

Language
English

ISSN
0022-1090

DOI