Multiplicity in General Financial Equilibrium with Portfolio Constraints
AbstractThis 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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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5804.
Date of creation: Aug 2006
Date of revision:
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- Basak, Suleyman & Cass, David & Licari, Juan Manuel & Pavlova, Anna, 2008. "Multiplicity in general financial equilibrium with portfolio constraints," Journal of Economic Theory, Elsevier, vol. 142(1), pages 100-127, September.
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-28 (All new papers)
- NEP-CFN-2006-10-28 (Corporate Finance)
- NEP-FIN-2006-10-28 (Finance)
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