Multiplicity in General Financial Equilibrium with Portfolio Constraints
This paper explores the role of portfolio constraints in generating multiplicity of equilibrium. We present a simple financial market economy with two goods and two households, households who face constraints on their ability to take unbounded positions in risky stocks. Absent such constraints, equilibrium allocation is unique and is Pareto efficient. With one portfolio constraint in place, the efficient equilibrium is still possible; however, additional inefficient equilibria in which the constraint is binding may emerge. We show further that with portfolio constraints cum incomplete markets, there may be a continuum of equilibria; adding incomplete markets may lead to real indeterminacy.
|Date of creation:||Aug 2006|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John Geanakoplos & Michael Magill & Martine Quinzii & J. Dreze, 1988.
"Generic Inefficiency of Stock Market Equilibrium When Markets Are Incomplete,"
Cowles Foundation Discussion Papers
863, Cowles Foundation for Research in Economics, Yale University.
- Geanakoplos, J. & Magill, M. & Quinzii, M. & Dreze, J., 1990. "Generic inefficiency of stock market equilibrium when markets are incomplete," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 113-151.
- Geanakoplos,Â J. & Magill, M. & Quinzii,Â M. & Dreze,Â J., . "Generic inefficiency of stock market equilibrium when markets are incomplete," CORE Discussion Papers RP 916, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
- Pavlova, Anna & Cass, David, 2002.
"On Trees and Logs,"
4233-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
- David Cass & Anna Pavlova, . "On Trees and Logs," CARESS Working Papres 00-01, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
- Cass, David & Pavlova, Anna, 2003. "On Trees And Logs," Working papers 4233-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
- David Cass & Anna Pavlova, . "On Trees and Logs," Penn CARESS Working Papers e046baf19b9659b668c46a5f9, Penn Economics Department.
- 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.
- 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.
- Gerard Gennotte and Hayne Leland., 1989.
"Market Liquidity, Hedging and Crashes,"
Research Program in Finance Working Papers
RPF-184, University of California at Berkeley.
- Duffie, Darrell & Shafer, Wayne, 1985. "Equilibrium in incomplete markets: I : A basic model of generic existence," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 285-300, June.
- 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.
- Detemple, Jerome & Murthy, Shashidhar, 1997. "Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1133-74.
- Anna Pavlova & Roberto Rigobon, 2005.
"Wealth Transfers, Contagion, and Portfolio Constraints,"
NBER Working Papers
11440, National Bureau of Economic Research, Inc.
- Pavlova, Anna & Rigobon, Roberto, 2005. "Wealth Transfers, Contagion and Portfolio Constraints," CEPR Discussion Papers 5117, C.E.P.R. Discussion Papers.
- Barlevy, Gadi & Veronesi, Pietro, 2003.
"Rational panics and stock market crashes,"
Journal of Economic Theory,
Elsevier, vol. 110(2), pages 234-263, June.
- Peter M. Demarzo & Ron Kaniel & Ilan Kremer, 2004. "Diversification as a Public Good: Community Effects in Portfolio Choice," Journal of Finance, American Finance Association, vol. 59(4), pages 1677-1716, 08.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
- Balasko, Yves & Cass, David & Siconolfi, Paolo, 1990. "The structure of financial equilibrium with exogenous yields : The case of restricted participation," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 195-216.
- Jérôme Detemple & Angel Serrat, 2003. "Dynamic Equilibrium with Liquidity Constraints," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 597-629.
- Jérôme B. Detemple & Shashidhar Murthy, 1997. "Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints," CIRANO Working Papers 97s-12, CIRANO.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:5804. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct email address
If references are entirely missing, you can add them using this form.