Filtration Reduction and Incomplete Markets

This paper studies the impact of filtration reduction on incomplete markets. We provide a new theorem and an economic based approach for studying information reduction. We use filtration reduction to identify a unique equivalent martingale measure for pricing derivatives in an arbitrage-free, but incomplete market. The new martingale measure implies non-traded risks are non-priced. Our approach contrasts two distinct markets - the original and a fictitious - each associated with a different filtration, and employs the first and second fundamental theorems of asset pricing in both of these markets