If It Is Not Constructed As a ‘Market Completeness Metric,’ It Is Not a Market Completeness Metric

2019 ◽  
Author(s):  
Oghenovo A. Obrimah
Keyword(s):  
Market Completeness

Dynamic effects of consumption tax reforms with durable consumption

2020 ◽  
Vol 20 (2) ◽  
Author(s):  
Qian Li
Keyword(s):  
Generation Model ◽  
Consumption Tax ◽  
Income Risk ◽  
Tax Reforms ◽  
Market Completeness ◽  
Durable Consumption ◽  
Poor Households ◽  
Borrowing Constraint ◽  
The Difference ◽  
Consumption Taxes

AbstractThis paper introduces durables into a dynamic general equilibrium overlapping generation model with idiosyncratic income shocks and endogenous borrowing constraints, which depend on durables. The aim of this paper is to evaluate the welfare effects of consumption tax reforms in a richer model that captures the difference between nondurable and durable consumption. When durables are considered, the standard results that a shift to consumption taxes is welfare improving are overturned. The mechanism of this opposing result is that consumption tax makes durable consumption more expensive without relaxing the borrowing constraint. The inability of borrowing to insure against income risk deviates the economy further away from market completeness and particularly hurts young and poor households. As a result, welfare decreases, coupled with negative redistribution.

Price and Volume Effects Associated with ELW Issuance in Korea

2016 ◽  
Vol 24 (1) ◽  
pp. 1-30
Author(s):  
Bong-Chan Kho ◽  
Jin-Woo Kim
Keyword(s):  
Stock Market ◽  
Abnormal Returns ◽  
Trade Volume ◽  
Pricing Kernel ◽  
Market Completeness ◽  
Positive Effects ◽  
Option Contracts ◽  
Korean Stock Market ◽  
Option Pricing Model ◽  
Underlying Stocks

The option pricing model of Black and Scholes (1973) shows that an option contract is redundant in a complete market as it can be completely replicated by its underlying assets and risk free assets. However, in a real world of incomplete markets, many studies have shown that option contracts are not redundant and can affect prices and trade volume of underlying assets as they contribute to the market completeness. Thus, this paper examines whether this holds for ELWs (Equity-Linked Warrants) in Korean stock market, which are well known to have the same function as option contracts. To do this, we analyze the effects of ELW listings on underlying stocks’ prices, trade volume, and volatilities, and test whether ELWs contribute to market completeness. Using the daily trading data of 5,799 ELWs on individual stocks from December 2005 to September 2011, we find that underlying stocks show significantly positive cumulative abnormal returns (CAARs) and abnormal trade volume after ELW listing dates, implying that the ELW listing affects significantly positive effects on prices and trade volume of underlying stocks. The volatility of underlying stocks is significantly decreasing after the ELW listing. The systematic risk measured as beta, however, does not change over the event window. This result indicates that the decrease in volatility of underlying stocks comes from the decrease of unsystematic risks, and the correlations between returns of market index and underlying stocks are increasing after the ELW listing. The result that ELW listing can have significant effects on the underlying market implies that current stock market is incomplete, and thus, it is natural to ask whether ELWs can contribute to market completeness. Using the method suggested by Buraschi and Jackwerth (2001), we examine whether ELWs are necessary to replicate the pricing kernel used in asset pricing. We select risk-free asset, underlying stock and ELW as reference assets to replicate the pricing kernel, and find that the pricing kernel cannot be replicated completely without ELWs. This result implies that ELWs are not redundant financial assets and are necessary to increase the market completeness in Korean stock market.

scholarly journals Annuities and Individual Welfare

2005 ◽  
Vol 95 (5) ◽  
pp. 1573-1590 ◽  
Author(s):  
Thomas Davidoff ◽  
Jeffrey R Brown ◽  
Peter A Diamond
Keyword(s):  
Sufficient Conditions ◽  
Optimal Consumption ◽  
Medical Expenses ◽  
Behavioral Biases ◽  
Market Completeness ◽  
Market Incompleteness ◽  
Demand Theory ◽  
Individual Welfare

Advancing annuity demand theory, we present sufficient conditions for the optimality of full annuitization under market completeness which are substantially less restrictive than those used by Menahem E. Yaari (1965). We examine demand with market incompleteness, finding that positive annuitization remains optimal widely, but complete annuitization does not. How uninsured medical expenses affect demand for illiquid annuities depends critically on the timing of the risk. A new set of calculations with optimal consumption trajectories very different from available annuity income streams still shows a preference for considerable annuitization, suggesting that limited annuity purchases are plausibly due to psychological or behavioral biases.

Effects of Introducing Equity-Linked Warrants on Stock Market Behavior

2010 ◽  
Vol 18 (4) ◽  
pp. 23-50
Author(s):  
Doojin Ryu
Keyword(s):  
Stock Price ◽  
Trading Volume ◽  
Informed Trading ◽  
Short Sales ◽  
Short Sale ◽  
Market Completeness ◽  
Announcement Date ◽  
Event Date ◽  
Study Methodology ◽  
Event Study Methodology

This paper investigates the effects of introducing equity-linked warrants (ELWs) on the stock price, trading volume, volatility, and systematic risk (beta) by using the event study methodology. The study defines the event date as the announcement date as well as the listing date. In addition, whereas previous research has investigated only call ELWs, this study analyzes the effects of introducing both call and put ELWs. The results provide no evidence of hedging effects of issuers before the announcement dates and information effects after the announcement dates. In addition, we can't find any significant changes of variables associated with the market completeness hypothesis near the listing dates. However, the trading volume of the stock tends to increase in the days immediately following the listing of call ELWs, which may be due to the “informed trading effect”. The empirical results also provide support for the “diminishing short-sales restrictions” hypothesis related to the listing of put ELWs, which implies that short-sale restrictions can be reduced because put ELWs can provide investors with short positions in the underlying stock.

On statistical indistinguishability of complete and incomplete market models

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nikolai Dokuchaev
Keyword(s):  
Stock Prices ◽  
Incomplete Market ◽  
Market Model ◽  
Market Models ◽  
Content Type ◽  
Market Completeness ◽  
Market Incompleteness ◽  
Complete Market ◽  
Robust Property ◽  
Statistical Detection

Purpose This paper aims to investigate possibility of statistical detection of market completeness for continuous time diffusion stock market models. Design/methodology/approach The paper uses theory of forecasting to find criteria of predictability of market parameters such as volatilities and the appreciation rates. Findings It is known that the market completeness is not a robust property: small random deviations of the coefficients convert a complete market model into an incomplete one. The paper shows that market incompleteness is also non-robust: for any incomplete market from a wide class of models, there exists a complete market model with arbitrarily close paths of the stock prices and the market parameters. Originality/value The paper results lead to a counterintuitive conclusion that the incomplete markets are indistinguishable in the terms of the market statistics.

The Martingale Approach to Optimal Investment

2019 ◽  
pp. 364-375
Author(s):  
Tomas Björk
Keyword(s):  
Dynamic Programming ◽  
Optimal Investment ◽  
Optimal Consumption ◽  
Martingale Approach ◽  
Market Completeness ◽  
Martingale Methods ◽  
Special Case

For the special case of optimal consumption/investment problems, there is an alternative to dynamic programming. The alternative is based on market completeness and martingale methods. This approach is sometimes much easier to apply than dynamic programming and we derive the necessary theory in some detail. The theory is then applied to several concrete problems which are solved in detail.

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