2013/01/16 by David M. Pennock, Pennock, David M., Michael P. Wellman +1
Computer Science · Economics, Econometrics and Finance · Engineering · #Bayesian Modeling and Causal Inference #Complex Systems and Time Series Analysis #Computer Science and Game Theory (cs.GT) #FOS: Computer and information sciences #FOS: Economics and business #General Finance (q-fin.GN) #Reservoir Engineering and Simulation Methods #cs.GT #q-fin.GN
paper · pdf · doi:10.48550/arxiv.1301.3886
Appears in Proceedings of the Sixteenth Conference on Uncertainty in Artificial Intelligence (UAI2000)
arxiv created 2013/01/16 · openalex publication_date 2013/01/16 · arxiv updated 2013/01/18 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
The emphsecurities market is the fundamental theoretical framework in economics and finance for resource allocation under uncertainty. Securities serve both to reallocate risk and to disseminate probabilistic information. emphComplete securities markets - which contain one security for every possible state of nature - support Pareto optimal allocations of risk. Complete markets suffer from the same exponential dependence on the number of underlying events as do joint probability distributions. We examine whether markets can be structured and "compacted" in the same manner as Bayesian network representations of joint distributions. We show that, if all agents' risk-neutral independencies agree with the independencies encoded in the market structure, then the market is emphoperationally complete: risk is still Pareto optimally allocated, yet the number of securities can be exponentially smaller. For collections of agents of a certain type, agreement on Markov independencies is sufficient to admit compact and operationally complete markets.