Multiplicity in General Financial Equilibrium with Portfolio Constraints, Second Version
AbstractThis paper explores the role of portfolio constraints in generating multiplicity of equilibrium. We present a simple financial market economy with two goods and two households, households who face constraints on their ability to take unbounded positions in risky stocks. Absent such constraints, equilibrium allocation is unique and is Pareto efficient. With one portfolio constraint in place, the efficient equilibrium is still possible; however, additional inefficient equilibria in which the constraint is binding may emerge. We show further that with portfolio constraints cum incomplete markets, there may be a continuum of equilibria; adding incomplete markets may lead to real indeterminacy.
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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 06-020.
Length: 36 pages
Date of creation: 01 Mar 2006
Date of revision: 17 Jul 2006
Multiple equilibria; asset pricing; portfolio constraints; indeterminacy; financial equilibrium;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-28 (All new papers)
- NEP-CFN-2006-07-28 (Corporate Finance)
- NEP-DGE-2006-07-28 (Dynamic General Equilibrium)
- NEP-FIN-2006-07-28 (Finance)
- NEP-FMK-2006-07-28 (Financial Markets)
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