Econometrica: May 1979, Volume 47, Issue 3

The Arrow-Debreu Model Extended to Financial Markets

https://doi.org/0012-9682(197905)47:3<689:TAMETF>2.0.CO;2-Z
p. 689-708

Peter H. Friesen

The Arrow-Debreu model is extended to include a sequential market model with financial markets. This is done by dropping the contingent contracts from the Arrow-Debreu model, leaving only a sequence of spot markets for commodities. The resulting market structure is inefficient. Efficiency is restored with a sequence of stock markets and option markets. In addition, consumers are shown to be unanimous in wanting each firm to maximize the price of its common stock.

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