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Arbitrage and equilibrium with portofolio constraints

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Abstract

We consider a multiperiod financial exchange economy with nominal assets and restricted participation, where each agent's portfolio choice is restricted to a closed, convex set containing zero, as in Siconolfi (1989). Using an approach that dates back to Cass (1984, 2006) in the unconstrained case, we seek to isolate arbitrage-free asset prices that are aloso quasi-equilibrium or equilibrium asset prices. In the presence of such portfolio restrictions, we need to confine our attention to aggregate arbitrage-free asset prices, i.e., for which there is no arbitrage in the space of marketed portfolios. Our main result states that such asset prices are quasi-equilibrium prices under standard assumptions and then deduce that they are equilibrium prices under a suitable condition on the accessibility of payoffs by agents, i.e., every payoff that is attainable in the aggregate can be marketed through some agent's portfolio set. This latter result extends previous work by Martins-da-Rocha and Triki (2005).

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Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 09077.

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Length: 21 pages
Date of creation: Oct 2009
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Handle: RePEc:mse:cesdoc:09077

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Keywords: Stochastic financial exchange economies; incomplete markets; financial equilibrium; constrained portfolios; multiperiod models; arbitrage-free asset prices.;

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Citations

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Cited by:
  1. Jean-Marc Bonnisseau & Achis Chery, 2013. "Tackling the instability of growth: A Kaleckian model with autonomous demand expenditures," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 13029, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  2. Aouani, Zaier & Cornet, Bernard, 2011. "Reduced equivalent form of a financial structure," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 318-327.
  3. Miguel A. Iraola & Juan Pablo Torres-Martinez, 2013. "Liquidity Contractions, Incomplete Financial Participation and the Prevalence of Negative Equity Non-Recourse Loans," Working Papers, University of Miami, Department of Economics 2013-08, University of Miami, Department of Economics.
  4. Pérez Fernández, Víctor & Torres-Martínez, Juan Pablo, 2012. "Incomplete financial participation: exclusive markets, investment clubs and credit risk," MPRA Paper 36624, University Library of Munich, Germany.
  5. Jean-Marc Bonnisseau & Achis Chery, 2013. "Stability of marketable payoffs with long-term assets," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 13078, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  6. Jean-Marc Bonnisseau & Achis Chery, 2011. "On the rank of payoff matrices with long-term assets," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00659183, HAL.
  7. Bernard Cornet & Zaier Aouani, 2009. "Existence of financial equilibria with restricted participation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200909, University of Kansas, Department of Economics, revised Dec 2009.
  8. Jean-Marc Bonnisseau & Achis Chery, 2013. "Sensitivity of marketable payoffs with long-term assets," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00821094, HAL.
  9. Sebastián Cea-Echenique & Carlos Hervés-Beloso & Juan Pablo Torres-Martínez, 2012. "Endogenous Information: The Role of Sequential Trade and Financial Participation," Working Papers, University of Chile, Department of Economics wp361, University of Chile, Department of Economics.
  10. repec:hal:journl:halshs-00659183 is not listed on IDEAS
  11. Seghir, Abdelkrim & Torres-Martínez, Juan Pablo, 2011. "On equilibrium existence with endogenous restricted financial participation," Journal of Mathematical Economics, Elsevier, vol. 47(1), pages 37-42, January.
  12. Cea-Echenique, Sebastián & Torres-Martínez, Juan Pablo, 2014. "General Equilibrium with Endogenous Trading Constraints," MPRA Paper 55359, University Library of Munich, Germany.

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