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The Structure of Financial Equilibrium with Exogenous Yields: The Case of Incomplete Markets

Econometrica 1989 57(1), 135
This paper presents an analysis of the structure of competitive equilibrium in a smooth, exchange economy where there are incomplete markets in financial instruments whose overall payoffs (both prices and yields) are fixed in units of account. The main result establishes that such market incompleteness generates a comparable degree of allocation indeterminateness. It is also shown how this real indeterminacy may increase when prices and yields are treated as variables rather than parameters.