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Asymptotic methods for asset market equilibrium analysis

Author

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  • Sy-Ming Guu

    (Department of Industrial Engineering, Yuan-Ze University, Nei-Li, Taoyuan, Taiwan 32026, R.O.C.)

  • Kenneth L. Judd

    (Hoover Institution, Stanford, CA 94305, USA)

Abstract

General equilibrium analysis is difficult when asset markets are incomplete. We make the simplifying assumption that uncertainty is small and use bifurcation methods to compute Taylor series approximations for asset demand and asset market equilibrium. A computer must be used to derive these approximations since they involve large amounts of algebraic manipulation. We use this method to analyze the allocative and welfare effects of introducing a new security. We find that adding any nontrivial derivative security will raise the price of the risky security relative to the bond when risks are small.

Suggested Citation

  • Sy-Ming Guu & Kenneth L. Judd, 2001. "Asymptotic methods for asset market equilibrium analysis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(1), pages 127-157.
    • Handle: RePEc:spr:joecth:v:18:y:2001:i:1:p:127-157
    Note: Received: April 1, 2000; revised version: January 10, 2001
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    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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