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Art Finance. Statement 1

All we know about the correct pricing of sophisticated financial assets comes from a theoretical  model where those assets are not necessary.

What we Know is the following. In the first place prices of assets have structure, they are not anything. In the second place those prices are “martingales”. That is they follow a stochastic process which cannot be predicted. No amount of  observed past realizations gives a hint of the following one.

 These two facts, together with some others we can dispense with now, can be shown to be true in a General Equilibrium Model with a complete set of markets, i.e a model in which  any good available at any time and under any state of nature, can be traded today.

But if this is the case there is no room for a financial sector because purchasing power can be transfered in any direction, between dates and between states of nature.

What happens in fact is that the set on markets could be complete because there is a financial sector with enough independent assets as to “span” the whole set of markets.

So it happens that Finance is a good metaphore for the aery aspect of Art. May be the world is kind of perfect bacause of Art or may be Art only has all its power in a world in which it is not necessary.

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