Valuation Implications of Market Incompleteness : A Robust Empirical Characterization of Stock Market Incompleteness

This study shows listings of new issues that occur in order of increasing, or decreasing average quality are general equilibrium listing paths, equivalently necessary conditions for maintenance of best valuations within stock markets. This finding demonstrates robustness of an existing price equilibrium never is independent of entire listing sequence of new innovations within stock markets. Introduction of pragmatism of nigh impossibility of satisfaction of the general equilibrium necessary conditions induces either of systemic undervaluation, or overvaluation of new issues. Given either of undervaluations or overvaluations are robust to presence of certifying financial intermediaries, credible signals of issuer quality, presence of rational investors, and efficiency of aggregation of information, stock markets inherently are imperfect mechanisms for allocation of capital. Consistent with relevance of stock markets only in context of management of market imperfections, presence of information asymmetries within populations of investors is associated with better equilibriums than homogeneity of investors' information. Study findings yield an empirically tractable, yet formal theoretical characterization for severity of stock market incompleteness, which is, severity of deviations from, or perturbations to general equilibrium listing paths. An important side outcome of the formal theoretical modeling is arrival at the first fully rational formal theoretical rationalizations for stock return momentum, stock return reversals, and intermittency of arrival of price correction events within stock markets