If It Is Not Constructed As a ‘Market Completeness Metric,’ It Is Not a Market Completeness Metric

Abstract

Suppose an economy is characterized by triad of information asymmetries, efficient aggregation of information, and populations of fully rational agents. This economy is postulated to be an ideal economy for domicile of stock markets. This study shows that in absence of metrics for assessing each of `market incompleteness' properties of stock markets, and market completeness properties of new issues of equity (combined, `market completeness metrics'), an economy cannot be construed to be an ideal economy for stock markets. In absence of market completeness metrics, while economic agents are able to act rationally, the formal theoretical evidence shows they are unable to arrive at fully rational behavior. Absence of capacity for arrival at full rationality induces stock markets within which investments in stocks are no more than gambles on future payoffs. Formal theoretical proofs reveal absence of any substitute mechanisms for inferring each of incompleteness properties of stock markets, or market completeness properties of new issues of equity. Mechanisms that are shown to fall short are inclusive of return correlations, market betas, portfolio information ratios, heterogeneity of industries, metrics for portfolio diversification, analyst recommendations, or metrics for ranking of rationality of price equilibriums. The formal theoretical evidence demonstrates that pricing of stocks on basis of dividends, equivalently future consumption magnifies uncertainties about future states of the world, and induces oligopolistic behaviors within product markets. Substitution of demand for stocks on basis of market completeness properties mitigates uncertainties about future states of the world, and enhances effectiveness of price competition within product markets. Study findings provide formal theoretical evidence for necessity of development of new algorithms that facilitate more robust pricing of publicly listed equities.