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The General Equilibrium Framework with Default and Collateral

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  • Feijó, Ricardo Luis Chaves

Abstract

This paper presents the evolution of the most recent mathematical models of general equilibrium, starting with the model of contingent commodities, through the sequential model with secutirites, even to the case of equilibrium with default and collateralized securities markets. To this end, we discuss on the main ideas regarding the application of microeconomic theory of general equilibrium to situations involving the exchange and resource allocation under conditions of uncertainty. Then we present the conditions of general equilibrium when financial markets are incomplete. We make a critical evaluation of assumptions for such models. Further, we introduce the discussion of the role of default in market general equilibrium, and finally we discuss the effect of collateral for the general equilibrium. Given a selection of eight important papers, the article examines the assumptions and mathematical behavioral models of each family and examines the main theorems that demonstrate whether or not the existence of general equilibrium in incomplete security markets with default and collateral. Still follows a classification of the assumptions underlying the set of theorems of general equilibrium shown in the literature considered.

Suggested Citation

  • Feijó, Ricardo Luis Chaves, 2013. "The General Equilibrium Framework with Default and Collateral," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 67(3), September.
    • Handle: RePEc:fgv:epgrbe:v:67:y:2013:i:3:a:4133
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    1. Zame, William R, 1993. "Efficiency and the Role of Default When Security Markets Are Incomplete," American Economic Review, American Economic Association, vol. 83(5), pages 1142-1164, December.
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    9. Aloisio Araujo & Mário Rui Páscoa & Juan Pablo Torres-Martínez, 2002. "Collateral Avoids Ponzi Schemes in Incomplete Markets," Econometrica, Econometric Society, vol. 70(4), pages 1613-1638, July.
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