This is in contrast with the Modigliani-Miller Theorem, which implies that, with informational symmetry, such financial hedging is irrelevant. Even though markets are incomplete, it is possible, in certain cases, to identify hedging policies that are unanimously supported by shareholders. These results suggest that the firm act as though it were highly risk averse with regard to its financial hedging policy. This contrasts with the firm's production decisions, which generally would be made from a much more risk neutral perspective. Existence of equilibrium with incomplete markets is problematic because demand functions are typically not continuous.
Discontinuities occur at prices for which a marketed asset suddenly becomes redundant.
We show that this discontinuity disappears if we allow an agent in the economy to introduce a new asset when such redundancies occur. This enables us to prove generic existence with incomplete markets using a standard path-following argument. Moreover, our approach suggests a simple algorithm for computing equilibria when markets are incomplete. We use this algorithm to compute equilibrium for a numerical example in which these discontinuities are problematic. The Modigliani-Miller Theorem is considered in a general model of a multiperiod, stochastic economy with incomplete markets and perfect foresight.