Lecture02OnePeriodModel.pptVIP

Overview Securities Structure Arrow-Debreu securities structure Redundant securities Market completeness Completing markets with options Pricing (no arbitrage, state prices, SDF, EMM …) Optimization and Representative Agent(Pareto efficiency, Welfare Theorems, …) The Economy State space (Evolution of states) Two dates: t=0,1 S states of the world at time t=1 Preferences U(c0, c1, …,cS) (slope of indifference curve) Security structure Arrow-Debreu economy General security structure Security Structure Security j is represented by a payoff vector Security