Ergodic Markov equilibrium with incomplete markets and short sales
This paper studies recursive exchange economies with short sales. Agents maximize discounted expected utility. The asset structure is general and includes real securities, infinite-lived stocks, options, and other derivatives. The main result shows the existence of a competitive equilibrium process that is stationary and has an invariant ergodic measure. Ergodicity is required in finance for time series analysis of structural asset pricing models. This equilibrium property is difficult to obtain when heterogeneous agents can accumulate debt over time. Bounded marginal utility is shown to be a key condition for ergodicity in this setting.
References listed on IDEAS
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The Warwick Economics Research Paper Series (TWERPS)
921, University of Warwick, Department of Economics.
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- Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
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- Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
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