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Characterizing the Equilibrium

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  • Robert A. Jarrow

    (Cornell University)

Abstract

Assuming that an equilibrium exists, this chapter characterizes the economic equilibrium. For simplicity of presentation, this chapter focuses on traders having preferences only over terminal wealth. The last section in this chapter discusses the necessary changes needed to include intermediate consumption. The key result in this chapter is a characterization of the equilibrium supermartingale deflator as a function of the economy’s primitives: beliefs, preferences, and endowments. Indeed, using a representative trader economy equilibrium that reflects the equilibrium in the original economy, an equilibrium supermartingale deflator is characterized as a function of the representative trader’s (aggregate) utility function and aggregate market wealth. Finally, this chapter derives the intertemporal capital asset pricing model (ICAPM) and the consumption capital asset pricing model (CCAPM) as special cases of this characterization.

Suggested Citation

Handle: RePEc:spr:sprfcp:978-3-030-74410-6_15
DOI: 10.1007/978-3-030-74410-6_15
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