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Taylor approximation of incomplete Radner equilibrium models

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  • Jin Hyuk Choi
  • Kasper Larsen
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    Abstract

    In the setting of exponential investors and uncertainty governed by Brownian motions we first prove the existence of an incomplete equilibrium for a general class of models. We then introduce a tractable class of exponential-quadratic models and prove that the corresponding incomplete equilibrium is characterized by a coupled set of Riccati equations. Finally, we prove that these exponential-quadratic models can be used to approximate the incomplete models we studied in the first part.

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    File URL: http://arxiv.org/pdf/1310.2973
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    Paper provided by arXiv.org in its series Papers with number 1310.2973.

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    Date of creation: Oct 2013
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    Handle: RePEc:arx:papers:1310.2973

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    1. Christensen, Peter Ove & Larsen, Kasper & Munk, Claus, 2012. "Equilibrium in securities markets with heterogeneous investors and unspanned income risk," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1035-1063.
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