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Implementing Arrow-Debreu equilibria by trading infinitely-lived securities

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Kevin X.D. Huang
Jan Werner

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Abstract

We show that Arrow-Debreu equilibria with countably additive prices in infinite-time economy under uncertainty can be implemented by trading infinitely-lived securities in complete sequential markets under two different portfolio feasibility constraints: wealth constraint, and essentially bounded portfolios. Sequential equilibria with no price bubbles implement Arrow-Debreu equilibria, while those with price bubbles implement Arrow-Debreu equilibria with transfers. Transfers are equal to price bubbles on initial portfolio holdings. Price bubbles arise in sequential equilibrium under the wealth constraint if some securities are in zero supply or negative prices are permitted, but cannot arise with essentially bounded portfolios.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 02-08.

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Date of creation: 2002
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Handle: RePEc:fip:fedkrw:rwp02-08

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Keywords: Prices ; Equilibrium (Economics);

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  4. David K. Levine & William Zame, 1996. "Debt Constraints and Equilibrium in Infinite Horizon Economies with Incomplete Markets," Levine's Working Paper Archive 1954, David K. Levine. [Downloadable!]
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  5. Duffie, J Darrell & Huang, Chi-fu, 1985. "Implementing Arrow-Debreu Equilibria by Continuous Trading of Few Long-lived Securities," Econometrica, Econometric Society, vol. 53(6), pages 1337-56, November. [Downloadable!] (restricted)
  6. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
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  7. Florenzano, Monique & Gourdel, Pascal, 1993. "Incomplete markets in infinite horizon : debt constraints versus node prices," CEPREMAP Working Papers (Couverture Orange) 9329, CEPREMAP.
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  8. Magill, Michael & Quinzii, Martine, 1994. "Infinite Horizon Incomplete Markets," Econometrica, Econometric Society, vol. 62(4), pages 853-80, July. [Downloadable!] (restricted)
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  9. Magill, Michael & Quinzii, Martine, 1996. "Incomplete markets over an infinite horizon: Long-lived securities and speculative bubbles," Journal of Mathematical Economics, Elsevier, vol. 26(1), pages 133-170. [Downloadable!] (restricted)
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  10. Aliprantis, Charalambos D & Brown, Donald J & Burkinshaw, Owen, 1987. "Edgeworth Equilibria," Econometrica, Econometric Society, vol. 55(5), pages 1109-37, September. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. G. Bloise & J.H. Dreze & H.M. Polemarchakis, 2002. "Money and Indeterminacy Over an Infinite Horizon," Working Papers 2002-12, Brown University, Department of Economics. [Downloadable!]
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  2. Marco Bassetto & Thomas J. Sargent, 2005. "Politics and efficiency of separating capital and ordinary Government budgets," Working Paper Series WP-05-07, Federal Reserve Bank of Chicago. [Downloadable!]
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  3. Patarick Leoni, 2006. "Market Power, Survival and Accuracy of Predictions in Financial Markets," Economics, Finance and Accounting Department Working Paper Series n1701106, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
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