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Endogenous restricted participation in general financial equilibrium

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

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.

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Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 45 (2009)
Issue (Month): 12 (December)
Pages: 787-806

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Handle: RePEc:eee:mateco:v:45:y:2009:i:12:p:787-806
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  1. Suleyman Basak & Benjamin Croitoru, . "Equilibrium Mispricing in a Capital Market with Portfolio Constraints," Rodney L. White Center for Financial Research Working Papers 17-99, Wharton School Rodney L. White Center for Financial Research.
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  3. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
  4. Thorsten Hens & P. Jean-Jacques Herings & Arkadi Predtetchinskii, . "Limits to Arbitrage when Market Participation Is Restricted," IEW - Working Papers 176, Institute for Empirical Research in Economics - University of Zurich.
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  6. Cass, David & Siconolfi, Paolo & Villanacci, Antonio, 2001. "Generic regularity of competitive equilibria with restricted participation," Journal of Mathematical Economics, Elsevier, vol. 36(1), pages 61-76, September.
  7. Basak, Suleyman & Cass, David & Licari, Juan Manuel & Pavlova, Anna, 2008. "Multiplicity in general financial equilibrium with portfolio constraints," Journal of Economic Theory, Elsevier, vol. 142(1), pages 100-127, September.
  8. Polemarchakis, H. M. & Siconolfi, P., 1997. "Generic existence of competitive equilibria with restricted participation," Journal of Mathematical Economics, Elsevier, vol. 28(3), pages 289-311, October.
  9. Zigrand, Jean-Pierre, 2006. "Endogenous market integration, manipulation and limits to arbitrage," Journal of Mathematical Economics, Elsevier, vol. 42(3), pages 301-314, June.
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  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 835-72.
  12. Laura Carosi, 2001. "Optimality in a financial economy with outside money and restricted participation," Decisions in Economics and Finance, Springer, vol. 24(1), pages 1-19, 05.
  13. 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.
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