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Existence and structure of stochastic equilibria with intertemporal substitution

  • Frank Riedel

    ()

    (Institut für Wirtschaftstheorie I, Humboldt-Universität zu Berlin, Spandauer Straße 1, Germany Manuscript)

  • Peter Bank

    ()

    (Institut für Mathematik, Humboldt-Universität zu Berlin, Unter den Linden 6, D-10099 Berlin, Germany)

We prove existence of an Arrow-Debreu equilibrium when agents' preferences exhibit local substitution in the sense of Hindy, Huang, and Kreps (1992). Efficient allocations and supporting price functionals are identified and characterized. Under Hindy-Huang-Kreps preferences, equilibrium price processes are semimartingales for arbitrary endowments, but in general, they do not belong to the space suggested originally by Hindy and Huang (1992) due to an additional singular local time component.

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Article provided by Springer in its journal Finance and Stochastics.

Volume (Year): 5 (2001)
Issue (Month): 4 ()
Pages: 487-509

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Handle: RePEc:spr:finsto:v:5:y:2001:i:4:p:487-509
Note: received: July 2000; final version received: January 2001
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