On statistical indistinguishability of complete and incomplete market models
Studies in Economics and Finance
ISSN: 1086-7376
Article publication date: 8 February 2021
Issue publication date: 11 March 2021
Abstract
Purpose
This paper aims to investigate possibility of statistical detection of market completeness for continuous time diffusion stock market models.
Design/methodology/approach
The paper uses theory of forecasting to find criteria of predictability of market parameters such as volatilities and the appreciation rates.
Findings
It is known that the market completeness is not a robust property: small random deviations of the coefficients convert a complete market model into an incomplete one. The paper shows that market incompleteness is also non-robust: for any incomplete market from a wide class of models, there exists a complete market model with arbitrarily close paths of the stock prices and the market parameters.
Originality/value
The paper results lead to a counterintuitive conclusion that the incomplete markets are indistinguishable in the terms of the market statistics.
Keywords
Citation
Dokuchaev, N. (2021), "On statistical indistinguishability of complete and incomplete market models", Studies in Economics and Finance, Vol. 38 No. 1, pp. 114-125. https://doi.org/10.1108/SEF-01-2020-0023
Publisher
:Emerald Publishing Limited
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