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Dynamic Aggregation and Computation of Equilibria in Finite-Dimensional Economies with Incomplete Financial Markets

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Author Info

  • Domenico Cuoco

    (The Wharton School, University of Pennsylvania)

  • Hua He

    (Yale School of Management, Yale University)

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Abstract

This paper constructs a representative agent supporting the equilibrium allocation in ¡°event-tree¡± economies with time-additive preferences and possibly incomplete securities markets. If the equilibrium allocation is Pareto optimal, this construction gives the usual linear welfare function. Otherwise, the representative agent¡¯s utility function is state-dependent, even when individual agents have state-independent utilities and homogeneous beliefs. The existence of a representative agent allows us to provide a characterization of equilibria which does not rely on the derivation of the agents¡¯ intertemporal demand functions for consumption and investment and transforms the dynamic general equilibrium problem into a static one. This characterization is therefore especially well suited for numerical computation of equilibria in economies with incomplete financial markets.

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File URL: http://www.aeconf.net/Articles/Nov2001/aef020201.pdf
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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 2 (2001)
Issue (Month): 2 (November)
Pages: 265-296

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Handle: RePEc:cuf:journl:y:2001:v:2:i:2:p:265-296

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Related research

Keywords: Equilibria; Aggregation; Incomplete markets;

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References

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  1. Cass, David, 2006. "Competitive equilibrium with incomplete financial markets," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 384-405, August.
  2. Brown, Donald J & DeMarzo, Peter M & Eaves, B Curtis, 1996. "Computing Equilibria When Asset Markets Are Incomplete," Econometrica, Econometric Society, vol. 64(1), pages 1-27, January.
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Cited by:
  1. Felix Kubler & Piero Gottardi, 2012. "Dynamic Competitive Economies with Complete Markets and Collateral Constraints," 2012 Meeting Papers 467, Society for Economic Dynamics.
  2. Bhamra, Harjoat Singh & Uppal, Raman, 2006. "The Effect of Introducing a Non-redundant Derivative on the Volatility of Stock-Market Returns," CEPR Discussion Papers 5726, C.E.P.R. Discussion Papers.

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