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Endogenous restricted participation in general financial equilibrium

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  • Carosi, Laura
  • Gori, Michele
  • Villanacci, Antonio

Abstract

We consider an incomplete market model with numeraire assets. Each household faces an individual constraint on its participation in the asset market. In related literature, the constraint is described by a function whose sole argument is the asset portfolio. On the contrary, in our analysis the constraint depends not only on the asset portfolio, but also on asset and good prices--hence the reference to endogenous (in contrast to exogenous) in the title. Economies are described by endowments of commodities, utility functions, asset yield matrices, and restriction functions. We study two specifications of the constraint function. The first one is homogeneous of degree zero with respect to spot prices. The second one does not exhibit that property. We then consistently distinguish between homogeneous and nonhomogeneous economies. After having established existence of equilibria for both types of economies, we study indeterminacy for each of them and show the following results. For an open and dense subset of the set of homogeneous economies, equilibria are finite and regular, up to innocuous price normalizations. There exists an open and nonempty set of nonhomogeneous economies, whose associated equilibria exhibit real indeterminacy.

Suggested Citation

  • Carosi, Laura & Gori, Michele & Villanacci, Antonio, 2009. "Endogenous restricted participation in general financial equilibrium," Journal of Mathematical Economics, Elsevier, vol. 45(12), pages 787-806, December.
  • Handle: RePEc:eee:mateco:v:45:y:2009:i:12:p:787-806
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    References listed on IDEAS

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    1. Laura Carosi, 2001. "Optimality in a financial economy with outside money and restricted participation," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 24(1), pages 1-19, May.
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    7. Hens, Thorsten & Jean-Jacques Herings, P. & Predtetchinskii, Arkadi, 2006. "Limits to arbitrage when market participation is restricted," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 556-564, August.
    8. Harrison Hong & Jeremy C. Stein, 2003. "Differences of Opinion, Short-Sales Constraints, and Market Crashes," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 487-525.
    9. Basak, Suleyman & Croitoru, Benjamin, 2000. "Equilibrium Mispricing in a Capital Market with Portfolio Constraints," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 715-748.
    10. Zigrand, Jean-Pierre, 2006. "Endogenous market integration, manipulation and limits to arbitrage," Journal of Mathematical Economics, Elsevier, vol. 42(3), pages 301-314, June.
    11. Detemple, Jerome & Sundaresan, Suresh, 1999. "Nontraded Asset Valuation with Portfolio Constraints: A Binomial Approach," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 835-872.
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    Citations

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    Cited by:

    1. Bernard Cornet & Ramu Gopalan, 2010. "Arbitrage and equilibrium with portfolio constraints," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 45(1), pages 227-252, October.
    2. Matthew Hoelle & Marina Pireddu & Antonio Villanacci, 2016. "Incomplete financial markets with real assets and wealth-dependent credit limits," Journal of Economics, Springer, vol. 117(1), pages 1-36, January.
    3. 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.
    4. Sebastián Cea-Echenique & Carlos Hervés-Beloso & Juan Pablo Torres-Martínez, 2012. "Endogenous Information: The Role of Sequential Trade and Financial Participation," Working Papers wp361, University of Chile, Department of Economics.
    5. repec:eee:mateco:v:70:y:2017:i:c:p:115-122 is not listed on IDEAS
    6. Faias, Marta & Torres-Martínez, Juan Pablo, 2017. "Credit market segmentation, essentiality of commodities, and supermodularity," Journal of Mathematical Economics, Elsevier, vol. 70(C), pages 115-122.
    7. Aouani, Zaier & Cornet, Bernard, 2011. "Reduced equivalent form of a financial structure," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 318-327.
    8. Cea-Echenique, Sebastián & Torres-Martínez, Juan Pablo, 2014. "General Equilibrium with Endogenous Trading Constraints," MPRA Paper 55359, University Library of Munich, Germany.
    9. Gori, Michele & Pireddu, Marina & Villanacci, Antonio, 2013. "Regularity and Pareto improving on financial equilibria with price-dependent borrowing restrictions," Research in Economics, Elsevier, vol. 67(1), pages 100-110.
    10. Cea-Echenique, Sebastián & Torres-Martínez, Juan Pablo, 2016. "Credit segmentation in general equilibrium," Journal of Mathematical Economics, Elsevier, vol. 62(C), pages 19-27.
    11. Víctor Pérez Fernández & Juan Pablo Torres-Martínez, 2012. "Incomplete Financial Participation: Exclusive Markets, Investment Clubs, and Credit Risk," Working Papers wp363, University of Chile, Department of Economics.
    12. Michele Gori & Marina Pireddu & Antonio Villanacci, 2014. "Existence of financial equilibria with endogenous short selling restrictions and real assets," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 37(2), pages 349-371, October.
    13. Michail Anthropelos & Constantinos Kardaras, 2018. "Equilibrium in thin security markets under restricted participation," Papers 1802.09954, arXiv.org.
    14. Michele Gori & Marina Pireddu & Antonio Villanacci, 2010. "Regularity and Pareto Improving on financial equilibria with endogenous borrowing restrictions," Working Papers - Mathematical Economics 2010-08, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa, revised Aug 2012.

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