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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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Bibliographic Info

Paper provided by Maastricht University in its series Open Access publications from Maastricht University with number urn:nbn:nl:ui:27-12170.

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Date of creation: 2002
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Publication status: Published in Mathematics of operations research (2002) v.27, p.637-646
Handle: RePEc:ner:maastr:urn:nbn:nl:ui:27-12170

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Web page: http://www.maastrichtuniversity.nl/web/Home.htm

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Find related papers by JEL classification:

• C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
• C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
• C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
• C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
• D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
• D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
• G - Financial Economics

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1. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
   
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   • Herings, P.J.J., 1997. "A globally and universally stable price adjustment process," Open Access publications from Maastricht University urn:nbn:nl:ui:27-5943, Maastricht University.
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Cited by:

1. Herings, P. Jean-Jacques & Kubler, Felix, 2007. "Approximate CAPM when preferences are CRRA," Open Access publications from Maastricht University urn:nbn:nl:ui:27-12150, Maastricht University.
   
   • P. Herings & Felix Kubler, 2007. "Approximate CAPM When Preferences are CRRA," Computational Economics, Society for Computational Economics, vol. 29(1), pages 13-31, February.
   • Herings,P. Jean-Jacques & Kubler,Felix, 2003. "Approximate CAPM When Preferences Are CRRA," Research Memoranda 064, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
2. Jacco Thijssen, 2008. "A computational study on general equilibrium pricing of derivative securities," Annals of Finance, Springer, vol. 4(4), pages 505-523, October.
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 2003-79, Tilburg University, Center for Economic Research.
   
   • Talman, A.J.J. & Thijssen, J.J.J., 2006. "Existence of equilibrium and price adjustments in a finance economy with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 42(3), pages 255-268, June.
4. P. Jean-Jacques Herings & Felix Kubler, 2000. "The Robustness of the CAPM-A Computational Approach," Econometric Society World Congress 2000 Contributed Papers 0400, Econometric Society.
   
   • Herings, P.J.J. & Kubler, F., 1999. "The Robustness of the CAPM - A Computational Approach," Discussion Paper 1999-54, Tilburg University, Center for Economic Research.
5. Esteban Bravo, Mercedes, 2008. "An interior-point algorithm for computing equilibria in economies with incomplete asset markets," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/7357, Universidad Carlos III de Madrid.
   
   • 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.

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