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Dynamic Aggregation and Computation of Equilibria in Finite-Dimensional Economies with Incomplete Financial Markets

Author

Listed:
  • Domenico Cuoco

    (The Wharton School, University of Pennsylvania)

  • Hua He

    (Yale School of Management, Yale University)

Abstract

This paper constructs a representative agent supporting the equilibrium allocation in ¡°event-tree¡± economies with time-additive preferences and possibly incomplete securities markets. If the equilibrium allocation is Pareto optimal, this construction gives the usual linear welfare function. Otherwise, the representative agent¡¯s utility function is state-dependent, even when individual agents have state-independent utilities and homogeneous beliefs. The existence of a representative agent allows us to provide a characterization of equilibria which does not rely on the derivation of the agents¡¯ intertemporal demand functions for consumption and investment and transforms the dynamic general equilibrium problem into a static one. This characterization is therefore especially well suited for numerical computation of equilibria in economies with incomplete financial markets.

Suggested Citation

  • Domenico Cuoco & Hua He, 2001. "Dynamic Aggregation and Computation of Equilibria in Finite-Dimensional Economies with Incomplete Financial Markets," Annals of Economics and Finance, Society for AEF, vol. 2(2), pages 265-296, November.
  • Handle: RePEc:cuf:journl:y:2001:v:2:i:2:p:265-296
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    References listed on IDEAS

    as
    1. Cass, David, 2006. "Competitive equilibrium with incomplete financial markets," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 384-405, August.
    2. Brown, Donald J & DeMarzo, Peter M & Eaves, B Curtis, 1996. "Computing Equilibria When Asset Markets Are Incomplete," Econometrica, Econometric Society, vol. 64(1), pages 1-27, January.
    3. Conze, Antoine & Lasry, Jean Michel & Scheinkman, Jose, 1993. "2. Borrowing Constraints and International Comovements," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 34(Special I), pages 23-47, December.
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    Cited by:

    1. repec:eee:mateco:v:74:y:2018:i:c:p:119-127 is not listed on IDEAS
    2. Piero Gottardi & Felix Kubler, 2015. "Dynamic Competitive Economies with Complete Markets and Collateral Constraints," Review of Economic Studies, Oxford University Press, vol. 82(3), pages 1119-1153.
    3. Yili Chien & Harold Cole & Hanno Lustig, 2016. "Implications of Heterogeneity in Preferences, Beliefs and Asset Trading Technologies in an Endowment Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 215-239, April.
    4. Shen, Yang & Siu, Tak Kuen, 2013. "Stochastic differential game, Esscher transform and general equilibrium under a Markovian regime-switching Lévy model," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 757-768.
    5. Bhamra, Harjoat Singh & Uppal, Raman, 2006. "The Effect of Introducing a Non-redundant Derivative on the Volatility of Stock-Market Returns," CEPR Discussion Papers 5726, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Equilibria; Aggregation; Incomplete markets;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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