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Computing Equilibria When Asset Markets Are Incomplete

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  • Brown, Donald J
  • DeMarzo, Peter M
  • Eaves, B Curtis

Abstract

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. The authors show that this discontinuity disappears if they allow an agent in the economy to introduce a new asset when such redundancies occur. This enables them to prove generic existence with incomplete markets using a standard path-following argument. Moreover, the authors' approach suggests a simple algorithm for computing equilibria when markets are incomplete. They demonstrate this by computing equilibrium for a numerical example. Copyright 1996 by The Econometric Society.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 64 (1996)
Issue (Month): 1 (January)
Pages: 1-27

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Handle: RePEc:ecm:emetrp:v:64:y:1996:i:1:p:1-27

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Cited by:
  1. Bich, Philippe, 2006. "On the orientability of the asset equilibrium manifold," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 452-470, August.
  2. Bich, Philippe, 2005. "On the existence of approximated equilibria in discontinuous economies," Economics Papers from University Paris Dauphine 123456789/6191, Paris Dauphine University.
  3. Kubler, Felix & Schmedders, Karl, 2010. "Competitive equilibria in semi-algebraic economies," Journal of Economic Theory, Elsevier, vol. 145(1), pages 301-330, January.
  4. Herings,P. Jean-Jacques & Schmedders,Karl, 2000. "Computing Equilibria in Finance Economies with Incomplete Markets and Transaction Costs," Research Memorandum 049, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  5. repec:dgr:umamet:2002010 is not listed on IDEAS
  6. Wei Ma & Chuangyin Dang, 2013. "The Optimal Price of Default," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 145-167, May.
  7. Philippe Bich, 2006. "On the orientability of the asset equilibrium manifold," Post-Print halshs-00287677, HAL.
  8. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742 Elsevier.
  9. Domenico Cuoco & Hua He, 2001. "Dynamic Aggregation and Computation of Equilibria in Finite-Dimensional Economies with Incomplete Financial Markets," Annals of Economics and Finance, Society for AEF, vol. 2(2), pages 265-296, November.
  10. Kenneth L. Judd & Sy-Ming Guu, 2001. "Asymptotic Methods for Asset Market Equilibrium Analysis," NBER Working Papers 8135, National Bureau of Economic Research, Inc.
  11. Eaves, B. Curtis & Schmedders, Karl, 1999. "General equilibrium models and homotopy methods," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1249-1279, September.
  12. Philippe Bich, 2005. "On the existence of approximated equilibria in discontinuous economies," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00287685, HAL.
  13. Mercedes Esteban-Bravo, 2004. "An Interior Point Algorithm For Computing Equilibria In Economies With Incomplete Asset Markets," Business Economics Working Papers wb046023, Universidad Carlos III, Departamento de Economía de la Empresa.
  14. Schmedders, Karl, 1998. "Computing equilibria in the general equilibrium model with incomplete asset markets," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1375-1401, August.
  15. Bich, Philippe, 2006. "On the orientability of the asset equilibrium manifold," Economics Papers from University Paris Dauphine 123456789/6111, Paris Dauphine University.
  16. Momi, Takeshi, 2012. "Failure of the index theorem in an incomplete market economy," Journal of Mathematical Economics, Elsevier, vol. 48(6), pages 437-444.
  17. Momi, Takeshi, 2003. "The index theorem for a GEI economy when the degree of incompleteness is even," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 273-297, June.
  18. P. Jean-Jacques Herings & Felix Kubler, 2000. "The Robustness of the CAPM-A Computational Approach," Econometric Society World Congress 2000 Contributed Papers 0400, Econometric Society.
  19. Bich, Philippe, 2005. "On the existence of approximated equilibria in discontinuous economies," Journal of Mathematical Economics, Elsevier, vol. 41(4-5), pages 463-481, August.
  20. Philippe Bich, 2005. "On the existence of approximated equilibria in discontinuous economies," Post-Print halshs-00287685, HAL.

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