MIT shocks imply market incompleteness

The allocation after an unanticipated event (often called an “MIT shock”) is different from the allocation of a corresponding complete-market model that explicitly considers the possibility of the shock, even when the probability of the event approaches zero. •Macroeconomic studies frequently analyz...

Full description

Saved in:
Bibliographic Details
Published in:Economics letters 2021-01, Vol.198, p.109666, Article 109666
Main Author: Mukoyama, Toshihiko
Format: Article
Language:English
Subjects:
Incomplete markets
Markov analysis
MIT shock
Probability
Probability distribution
Resource allocation
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The allocation after an unanticipated event (often called an “MIT shock”) is different from the allocation of a corresponding complete-market model that explicitly considers the possibility of the shock, even when the probability of the event approaches zero. •Macroeconomic studies frequently analyze unanticipated shocks, called MIT shocks.•Taking the shock probability to zero is not equivalent to assuming an MIT shock.•An MIT-shock analysis implicitly assumes the asset market is incomplete.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2020.109666