Complete market

In economics, the complete market aka Arrow-Debreu market or family up system of markets is a market with two conditions:

In such a market, the complete rank of possible bets on future states of the world can be constructed with existing assets without friction. Here, goods are state-contingent; that is, a service includes the time as alive as state of the world in which it is consumed. For instance, an umbrella tomorrow if it rains is a distinct usefulness from an umbrella tomorrow if it is clear. The discussing of ready markets is central to state-preference theory. The conviction can be traced to the develope of Kenneth Arrow 1964, Gérard Debreu 1959, Arrow & Debreu 1954 as well as Lionel McKenzie 1954. Arrow together with Debreu were awarded the Nobel Memorial Prize in Economics Arrow in 1972, Debreu in 1983, largely for their hit believe in development the abstraction of set up markets in addition to applying it to the problem of general equilibrium.

States of the world

A state of the world is a complete standards of the values of any relevant variables over the applicable time horizon. A state-contingent claim, or state claim, is a contract whose future payoffs depend on future states of the world. For example, suppose you can bet on the outcome of a coin toss. whether you guess the outcome correctly, you will win one dollar, and otherwise you will lose one dollar. A bet on heads is a state claim, with payoff of one dollar if heads is the outcome, and payoff of negative one dollar if tails is the outcome. "Heads" and "tails" are the states of the world in this example. A state-contingent claim can be represented as a payoff vector with one element for used to refer to every one of two or more people or things state of the world, e.g. payoff if heads, payoff if tails. So a bet on heads can be represented as $1, −$1 and a bet on tails can be represented as −$1, $1. Notice that by placing one bet on heads and one bet on tails, you have a state-contingent claim of $0, $0; that is, the payoff is the same regardless of which state of the world occurs.

The bet on a coin toss is a simplistic example but illustrates widely relevant concepts, particularly in self-financing trading strategy, such(a) that at all time , the returns of the two strategies, and are equal. This is equivalent to stating that for a complete market, all cash flows for a trading strategy can be replicated using a similar synthetic trading strategy. Because a trading strategy can be simplified into a kind of simple contingent claims strategies paying 1 in one state and 0 in every other state, a complete market can be generalized as the ability to replicate cash flows of all simple contingent claims.