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Market clearing, utility functions, and securities prices

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  • Roberto Raimondo

Abstract

We prove the existence of equilibrium in a continuous-time finance model; our results include the case of dynamically incomplete markets as well as dynamically complete markets. In addition, we derive explicitly the stochastic process describing securities prices. The price process depends on the risk-aversion characteristics of the utility function, as well as on the presence of additional sources of wealth (including endowments and other securities). With a single stock, zero endowment in the terminal period, and Constant Relative Risk Aversion (CRRA) utility, the price process is geometric Brownian motion; in essentially any other situation, the price process is not a geometric Brownian motion. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Roberto Raimondo, 2005. "Market clearing, utility functions, and securities prices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(2), pages 265-285, February.
    • Handle: RePEc:spr:joecth:v:25:y:2005:i:2:p:265-285
    DOI: 10.1007/s00199-003-0445-5
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    Citations

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    Cited by:

    1. Calvet, Laurent E. & Fisher, Adlai J., 2008. "Multifrequency jump-diffusions: An equilibrium approach," Journal of Mathematical Economics, Elsevier, vol. 44(2), pages 207-226, January.
    2. James Mirrlees & Roberto Raimondo, 2013. "Strategies in the principal-agent model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 53(3), pages 605-656, August.
    3. Bayer, Christian & Rendall, Alan D. & Wälde, Klaus, 2019. "The invariant distribution of wealth and employment status in a small open economy with precautionary savings," Journal of Mathematical Economics, Elsevier, vol. 85(C), pages 17-37.
    4. Diasakos, Theodoros M, 2013. "Comparative Statics of Asset Prices: the effect of other assets' risk," SIRE Discussion Papers 2013-94, Scottish Institute for Research in Economics (SIRE).

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