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Multiplicity in general financial equilibrium with portfolio constraints

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Author Info
Basak, Suleyman
Cass, David
Licari, Juan Manuel
Pavlova, Anna

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Abstract

This paper explores the role of portfolio constraints in generating multiplicity of equilibrium. We present a simple financial market economy with two goods and two households, households who face constraints on their ability to take unbounded positions in risky stocks. Absent such constraints, equilibrium allocation is unique and is Pareto efficient. With one portfolio constraint in place, the efficient equilibrium is still possible; however, additional inefficient equilibria in which the constraint is binding may emerge. We show further that with portfolio constraints cum incomplete markets, there may be a continuum of equilibria; adding incomplete markets may lead to real indeterminacy.

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Publisher Info
Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 142 (2008)
Issue (Month): 1 (September)
Pages: 100-127
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Handle: RePEc:eee:jetheo:v:142:y:2008:i:1:p:100-127

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Web page: http://www.elsevier.com/locate/inca/622869

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  1. Detemple, Jerome & Murthy, Shashidhar, 1997. "Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(4), pages 1133-74.
  2. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(2), pages 309-41.
  3. Jérôme Detemple & Angel Serrat, 2003. "Dynamic Equilibrium with Liquidity Constraints," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 16(2), pages 597-629. [Downloadable!] (restricted)
  4. Cass, David & Pavlova, Anna, 2004. "On trees and logs," Journal of Economic Theory, Elsevier, vol. 116(1), pages 41-83, May. [Downloadable!] (restricted)
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  5. Jérôme B. Detemple & Shashidhar Murthy, 1997. "Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints," CIRANO Working Papers 97s-12, CIRANO. [Downloadable!]
  6. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April. [Downloadable!] (restricted)
  7. Anna Pavlova & Roberto Rigobon, 2005. "Wealth Transfers, Contagion, and Portfolio Constraints," NBER Working Papers 11440, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Duffie, Darrell & Shafer, Wayne, 1985. "Equilibrium in incomplete markets: I : A basic model of generic existence," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 285-300, June. [Downloadable!] (restricted)
  9. Barlevy, Gadi & Veronesi, Pietro, 2003. "Rational panics and stock market crashes," Journal of Economic Theory, Elsevier, vol. 110(2), pages 234-263, June. [Downloadable!] (restricted)
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  10. Cass, David & Siconolfi, Paolo & Villanacci, Antonio, 2001. "Generic regularity of competitive equilibria with restricted participation," Journal of Mathematical Economics, Elsevier, vol. 36(1), pages 61-76, September. [Downloadable!] (restricted)
  11. Balasko, Yves & Cass, David & Siconolfi, Paolo, 1990. "The structure of financial equilibrium with exogenous yields : The case of restricted participation," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 195-216. [Downloadable!] (restricted)
  12. Peter M. Demarzo & Ron Kaniel & Ilan Kremer, 2004. "Diversification as a Public Good: Community Effects in Portfolio Choice," Journal of Finance, American Finance Association, vol. 59(4), pages 1677-1716, 08. [Downloadable!] (restricted)
  13. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
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