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Computing Equilibria in Finance Economies

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Author Info
Herings,P. Jean-Jacques
Kubler,Felix (METEOR)

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Abstract

The general equilibrium model with incomplete asset markets provides a unified framework for many problems in finance and macroeconomics. In its simplest version with only two time periods and a single physical commodity the model is ideally suited for the study of problems in cross sectional asset pricing and portfolio theory. In this paper we develop a homotopy algorithm to approximate equilibria in these ''finance economies''. Since the algorithm is tailor made for finance economies, the number of nonlinear equations that has to be solved for, and therefore the computing time,is an order of magnitude smaller than that of existing general purpose algorithms.The algorithm is shown to be generically convergent. We implement the algorithm using HOMPACK. To illustrate its performance, we present various numerical examples and report running times.

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Paper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 010.

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Date of creation: 2002
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Handle: RePEc:dgr:umamet:2002010

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Keywords: Economics ;

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  3. Herings,O. Jean-Jacques & Kubler,Felix, 2000. "The Robustness of CAPM-A Computational Approach," Research Memoranda 035, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  4. Demarzo, Peter M. & Eaves, B. Curtis, 1996. "Computing equilibria of GEI by relocalization on a Grassmann manifold," Journal of Mathematical Economics, Elsevier, vol. 26(4), pages 479-497. [Downloadable!] (restricted)
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  7. Pincus, Karen & Rusbarsky, Mark & Wong, Jilnaught, 1989. "Voluntary formation of corporate audit committees among NASDAQ firms," Journal of Accounting and Public Policy, Elsevier, vol. 8(4), pages 239-265. [Downloadable!] (restricted)
  8. Duffie, Darrell & Shafer, Wayne, 1985. "Equilibrium in incomplete markets: I : A basic model of generic existence," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 285-300, June. [Downloadable!] (restricted)
  9. Ettredge, Mike & Simon, Dan & Smith, David & Stone, Mary, 1994. "Why do companies purchase timely quarterly reviews?," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 131-155, September. [Downloadable!] (restricted)
  10. Schmedders, Karl, 1998. "Computing equilibria in the general equilibrium model with incomplete asset markets," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1375-1401, August. [Downloadable!] (restricted)
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  14. Brown, Donald J & DeMarzo, Peter M & Eaves, B Curtis, 1996. "Computing Equilibria When Asset Markets Are Incomplete," Econometrica, Econometric Society, vol. 64(1), pages 1-27, January. [Downloadable!] (restricted)
  15. Menon, Krishnagopal & Deahl Williams, Joanne, 1994. "The use of audit committees for monitoring," Journal of Accounting and Public Policy, Elsevier, vol. 13(2), pages 121-139. [Downloadable!] (restricted)
  16. Eaves, B. Curtis & Schmedders, Karl, 1999. "General equilibrium models and homotopy methods," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1249-1279, September. [Downloadable!] (restricted)
  17. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier. [Downloadable!] (restricted)
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  1. Jacco Thijssen, 2008. "A computational study on general equilibrium pricing of derivative securities," Annals of Finance, Springer, vol. 4(4), pages 505-523, October. [Downloadable!] (restricted)
  2. P. Herings & Felix Kubler, 2007. "Approximate CAPM When Preferences are CRRA," Computational Economics, Springer, vol. 29(1), pages 13-31, February. [Downloadable!] (restricted)
    Other versions:
  3. Talman, A.J.J. & Thijssen, J.J.J., 2003. "Existence of equilibrium and price adjustments in a finance economy with incomplete markets," Discussion Paper 79, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  4. Mercedes Esteban-Bravo, 2004. "An Interior Point Algorithm For Computing Equilibria In Economies With Incomplete Asset Markets," Business Economics Working Papers wb046023, Universidad Carlos III, Departamento de Economía de la Empresa. [Downloadable!]
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