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Endogenous restricted participation in general financial equilibrium

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Author Info

  • Carosi, Laura
  • Gori, Michele
  • Villanacci, Antonio

Abstract

We consider an incomplete market model with numeraire assets. Each household faces an individual constraint on its participation in the asset market. In related literature, the constraint is described by a function whose sole argument is the asset portfolio. On the contrary, in our analysis the constraint depends not only on the asset portfolio, but also on asset and good prices--hence the reference to endogenous (in contrast to exogenous) in the title. Economies are described by endowments of commodities, utility functions, asset yield matrices, and restriction functions. We study two specifications of the constraint function. The first one is homogeneous of degree zero with respect to spot prices. The second one does not exhibit that property. We then consistently distinguish between homogeneous and nonhomogeneous economies. After having established existence of equilibria for both types of economies, we study indeterminacy for each of them and show the following results. For an open and dense subset of the set of homogeneous economies, equilibria are finite and regular, up to innocuous price normalizations. There exists an open and nonempty set of nonhomogeneous economies, whose associated equilibria exhibit real indeterminacy.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 45 (2009)
Issue (Month): 12 (December)
Pages: 787-806

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Handle: RePEc:eee:mateco:v:45:y:2009:i:12:p:787-806

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Web page: http://www.elsevier.com/locate/jmateco

Related research

Keywords: General equilibrium Restricted participation Financial markets Regularity Determinacy and indeterminacy of equilibria;

References

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  1. Detemple, Jerome & Sundaresan, Suresh, 1999. "Nontraded Asset Valuation with Portfolio Constraints: A Binomial Approach," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 12(4), pages 835-72.
  2. Suleyman Basak & Benjamin Croitoru, . "Equilibrium Mispricing in a Capital Market with Portfolio Constraints," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 17-99, Wharton School Rodney L. White Center for Financial Research.
  3. Herings,P. Jean-Jacques & Schmedders,Karl, 2000. "Computing Equilibria in Finance Economies with Incomplete Markets and Transaction Costs," Research Memorandum, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) 049, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  4. Polemarchakis, H. M. & Siconolfi, P., 1997. "Generic existence of competitive equilibria with restricted participation," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 28(3), pages 289-311, October.
  5. Laura Carosi, 2001. "Optimality in a financial economy with outside money and restricted participation," Decisions in Economics and Finance, Springer, Springer, vol. 24(1), pages 1-19, 05.
  6. Harrison Hong & Jeremy C. Stein, 2003. "Differences of Opinion, Short-Sales Constraints, and Market Crashes," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 16(2), pages 487-525.
  7. Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, American Economic Association, vol. 84(4), pages 933-55, September.
  8. Jérôme Detemple & Angel Serrat, 2003. "Dynamic Equilibrium with Liquidity Constraints," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 16(2), pages 597-629.
  9. Cass, David & Siconolfi, Paolo & Villanacci, Antonio, 2001. "Generic regularity of competitive equilibria with restricted participation," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 36(1), pages 61-76, September.
  10. Zigrand, Jean-Pierre, 2006. "Endogenous market integration, manipulation and limits to arbitrage," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 42(3), pages 301-314, June.
  11. Thorsten Hens & P. Jean-Jacques Herings & Arkadi Predtetchinskii, . "Limits to Arbitrage when Market Participation Is Restricted," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 176, Institute for Empirical Research in Economics - University of Zurich.
  12. Basak, Suleyman & Cass, David & Licari, Juan Manuel & Pavlova, Anna, 2008. "Multiplicity in general financial equilibrium with portfolio constraints," Journal of Economic Theory, Elsevier, Elsevier, vol. 142(1), pages 100-127, September.
  13. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
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Citations

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Cited by:
  1. Seghir, Abdelkrim & Torres-Martínez, Juan Pablo, 2011. "On equilibrium existence with endogenous restricted financial participation," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 47(1), pages 37-42, January.
  2. Pérez Fernández, Víctor & Torres-Martínez, Juan Pablo, 2012. "Incomplete financial participation: exclusive markets, investment clubs and credit risk," MPRA Paper 36624, University Library of Munich, Germany.
  3. Bernard Cornet & Ramu Gopalan, 2010. "Arbitrage and equilibrium with portfolio constraints," Economic Theory, Springer, Springer, vol. 45(1), pages 227-252, October.
  4. Michele Gori & Marina Pireddu & Antonio Villanacci, 2010. "Regularity and Pareto Improving on financial equilibria with endogenous borrowing restrictions," Working Papers - Mathematical Economics, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa 2010-08, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa, revised Aug 2012.
  5. Aouani, Zaier & Cornet, Bernard, 2011. "Reduced equivalent form of a financial structure," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 47(3), pages 318-327.
  6. Michele Gori & Marina Pireddu & Antonio Villanacci, 2010. "Existence of financial equilibria with endogenous short selling restrictions and real assets," Working Papers - Mathematical Economics, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa 2010-07, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa, revised Aug 2012.
  7. Gori, Michele & Pireddu, Marina & Villanacci, Antonio, 2013. "Regularity and Pareto improving on financial equilibria with price-dependent borrowing restrictions," Research in Economics, Elsevier, Elsevier, vol. 67(1), pages 100-110.
  8. Sebastián Cea-Echenique & Carlos Hervés-Beloso & Juan Pablo Torres-Martínez, 2012. "Endogenous Information: The Role of Sequential Trade and Financial Participation," Working Papers, University of Chile, Department of Economics wp361, University of Chile, Department of Economics.
  9. Cea-Echenique, Sebastián & Torres-Martínez, Juan Pablo, 2014. "General Equilibrium with Endogenous Trading Constraints," MPRA Paper 55359, University Library of Munich, Germany.

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