HEC Research Papers Series,
HEC Paris

Abstract: We consider an incomplete financial market exchange economy with nominal assets and finite number of traders, goods, states and signals. In this framework, we prove existence and regularity of rational expectations equilibria for any informational structure derived from prices. We provide a proof that completes the characterization of existence of equilibrium in these economies. While Polemarchakis and Siconolfi (1993) show existence only of fully nonrevealing equilibrium, and Rahi (1995) finds partially revealing equilibria for all economies satisfying a restrictive condition on the traders' equilibrium information structure, we dispense with Rahi's condition and offer a strategy of proof that applies directly to all cases of revelation.

Our proof of existence is based on homotopy methods. Given the way we construct our proof, we can easily link the asymmetric information model to the linear restricted participation models. We show how to apply the Cass trick in asymmetric information economies to control for asset prices, even if all agents are restricted, that is, partially informed.

Keywords: asymmetric information; rational expectations equilibrium; incomplete markets

JEL-codes: C62; G14

28 pages, March 30, 1999

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