9308589 Zame There is substantial empirical evidence to suggest that individual consumption is poorly correlated with aggregate consumption. Such data is difficult to reconcile with the picture suggested by the standard Arrow-Debreu complete markets model. One explanation might be that markets are in fact incomplete - and incompleteness of markets seems to be an observational fact. Unfortunately, this explanation begs several questions: Why should markets be incomplete? If markets are incomplete, what markets are missing, and which are present? Should incompleteness of markets be expected to matter? Four topics are studied which address these questions: 1. Does Market Incompleteness Matter? Can mutual insurance - through simple borrowing and lending - substitute for the full range of contingent contracts? 2. Innovation of Futures Contracts. If exchanges behave strategically in the innovation of financial securities, what securities should we expect to see? In what circumstances will exchanges have the proper incentives to offer a complete set of financial securities? 3. Economic Implications of Collateral. What are the economic implications of the fact that collateral is required for many loans? In particular, how do collateral requirements affect the set of assets that are offered, the price and price volatility of assets and commodities, and the efficiency of equilibrium allocations? 4. A Non-standard Approach to Models of Continuous Trading. What are the properties of markets in which assets are traded frequently, but financial markets remain dynamically incomplete?
