Advanced Search
MyIDEAS: Login to save this paper or follow this series

Incomplete-Market Equilibria Solved Recursively on an Event Tree

Contents:

Author Info

  • Bernard Dumas
  • Andrew Lyasoff
Registered author(s):

    Abstract

    We develop a method that allows one to compute incomplete-market equilibria routinely for Markovian equilibria (when they exist). The main difficulty to be overcome arises from the set of state variables. There are, of course, exogenous state variables driving the economy but, in an incomplete market, there are also endogenous state variables, which introduce path dependence. We write on an event tree the system of all first-order conditions of all times and states and solve recursively for state prices, which are dual variables. We illustrate this "dual" method and show its many practical advantages by means of several examples.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.nber.org/papers/w14629.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14629.

    as in new window
    Length:
    Date of creation: Dec 2008
    Date of revision:
    Publication status: published as Incomplete-Market Equilibria Solved Recursively on an Event Tree BERNARD DUMAS, ANDREW LYASOFF† Article first published online: 12 SEP 2012 DOI: 10.1111/j.1540-6261.2012.01775.x © 2012 The American Finance Association Issue The Journal of Finance The Journal of Finance Volume 67, Issue 5, pages 1897–1941, October 2012
    Handle: RePEc:nbr:nberwo:14629

    Note: AP EFG IFM TWP
    Contact details of provider:
    Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Email:
    Web page: http://www.nber.org
    More information through EDIRC

    Related research

    Keywords:

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    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.:
    as in new window
    1. Hua He and Neil D. Pearson., 1989. "Consumption and Portfolio Policies with Incomplete Markets and Short-Sale Constraints: The Finite Dimensional Case," Research Program in Finance Working Papers, University of California at Berkeley RPF-189, University of California at Berkeley.
    2. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(3), pages 443-87, June.
    3. Kubler, Felix & Schmedders, Karl, 2002. "Recursive Equilibria In Economies With Incomplete Markets," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 6(02), pages 284-306, April.
    4. Lucas, Deborah J., 1994. "Asset pricing with undiversifiable income risk and short sales constraints: Deepening the equity premium puzzle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 34(3), pages 325-341, December.
    5. Fatih Guvenen, 2009. "A parsimonious macroeconomic model for asset pricing," Staff Report, Federal Reserve Bank of Minneapolis 434, Federal Reserve Bank of Minneapolis.
    6. Francisco Gomes & Alexander Michaelides, 2008. "Asset Pricing with Limited Risk Sharing and Heterogeneous Agents," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(1), pages 415-448, January.
    7. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, Elsevier, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
    8. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
    9. Tom Krebs, 2002. "Non-Existence of Recursive Equilibria on Compact State Spaces When Markets are Incomplete," Working Papers 2002-17, Brown University, Department of Economics.
    10. 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.
    11. Felix Kubler & Karl Schmedders, 2003. "Stationary Equilibria in Asset-Pricing Models with Incomplete Markets and Collateral," Econometrica, Econometric Society, Econometric Society, vol. 71(6), pages 1767-1793, November.
    12. Michael Magill & Martine Quinzii, 2002. "Theory of Incomplete Markets, Volume 1," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262632543, December.
    13. Cass, David, 2006. "Competitive equilibrium with incomplete financial markets," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 384-405, August.
    14. Krueger, Dirk & Lustig, Hanno, 2010. "When is market incompleteness irrelevant for the price of aggregate risk (and when is it not)?," Journal of Economic Theory, Elsevier, Elsevier, vol. 145(1), pages 1-41, January.
    15. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 1997-37, Carnegie Mellon University, Tepper School of Business.
    16. DEBREU, Gérard, . "Economies with a finite set of equilibria," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -67, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    17. Hirsch, M. D. & Magill, M. & Mas-Colell, A., 1990. "A geometric approach to a class of equilibrium existence theorems," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 95-106.
    18. Husseini, S. Y. & Lasry, J. -M. & Magill, M. J. P., 1990. "Existence of equilibrium with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 39-67.
    19. Debreu, Gerard, 1972. "Smooth Preferences," Econometrica, Econometric Society, Econometric Society, vol. 40(4), pages 603-15, July.
    20. 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.
    21. Fatih Guvenen & Burhanettin Kuruscu, 2006. "Does Market Incompleteness Matter for Asset Prices?," Journal of the European Economic Association, MIT Press, MIT Press, vol. 4(2-3), pages 484-492, 04-05.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Georgy Chabakauri, 2010. "Asset pricing with heterogeneous investors and portfolio constraints," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 43142, London School of Economics and Political Science, LSE Library.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:14629. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.