I was looking at PS3 Problem 2 in 239B yesterday (Black Scholes with Stochastic Interest Rates) and I noticed that the set up of the problem has two risky assets (a stock and a zero coupon bond) and two independent brownian motions. However, a unique EMM does not exist and the markets are not complete.
It seems counterintuitive to have a non complete market with two risky assets and two indep BMs. In what situations with these conditions can markets be incomplete?
Thursday, June 7, 2007
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I think markets are complete with respect to time T since the T-zcb is traded.
For t less than T there is not a traded bond maturing then so you can't replicate a fixed payoff.
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