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Implementing Arrow-Debreu equilibria by trading infinitely-lived securities

  • Kevin X.D. Huang
  • Jan Werner

We show that Arrow-Debreu equilibria with countably additive prices in infinite-time economy under uncertainty can be implemented by trading infinitely-lived securities in complete sequential markets under two different portfolio feasibility constraints: wealth constraint, and essentially bounded portfolios. Sequential equilibria with no price bubbles implement Arrow-Debreu equilibria, while those with price bubbles implement Arrow-Debreu equilibria with transfers. Transfers are equal to price bubbles on initial portfolio holdings. Price bubbles arise in sequential equilibrium under the wealth constraint if some securities are in zero supply or negative prices are permitted, but cannot arise with essentially bounded portfolios.

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File URL: http://www.kansascityfed.org/publicat/Reswkpap/pdf/RWP02-08.pdf
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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 02-08.

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Date of creation: 2002
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Handle: RePEc:fip:fedkrw:rwp02-08
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  1. Luigi Montrucchio & Fabio Privileggi, 2001. "On Fragility of Bubbles in Equilibrium Asset Pricing Models of Lucas-Type," ICER Working Papers - Applied Mathematics Series 05-2001, ICER - International Centre for Economic Research.
  2. Magill, Michael & Quinzii, Martine, 1994. "Infinite Horizon Incomplete Markets," Econometrica, Econometric Society, vol. 62(4), pages 853-80, July.
  3. David K. Levine & William R. Zame, 1993. "Debt Constraints and Equilibrium in Infinite Horizon Economies with Incomplete Markets," UCLA Economics Working Papers 703, UCLA Department of Economics.
  4. Florenzano, Monique & Gourdel, Pascal, 1993. "Incomplete markets in infinite horizon : debt constraints versus node prices," CEPREMAP Working Papers (Couverture Orange) 9329, CEPREMAP.
  5. Magill, Michael & Quinzii, Martine, 1996. "Incomplete markets over an infinite horizon: Long-lived securities and speculative bubbles," Journal of Mathematical Economics, Elsevier, vol. 26(1), pages 133-170.
  6. Kocherlakota, N.R., 1990. "Bubbles and Constraints on Debt Accumulation," Working Papers 90-29, University of Iowa, Department of Economics.
  7. Aliprantis, Charalambos D & Brown, Donald J & Burkinshaw, Owen, 1987. "Edgeworth Equilibria," Econometrica, Econometric Society, vol. 55(5), pages 1109-37, September.
  8. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
  9. Peleg, Bezalel & Yaari, Menahem E, 1970. "Markets with Countably Many Commodities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 369-77, October.
  10. Kevin X.D. Huang & Jan Werner, 2000. "Asset price bubbles in Arrow-Debreu and sequential equilibrium," Economic Theory, Springer, vol. 15(2), pages 253-278.
  11. Kandori, Michihiro, 1988. "Equivalent Equilibria," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 401-17, August.
  12. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  13. Duffie, J Darrell & Huang, Chi-fu, 1985. "Implementing Arrow-Debreu Equilibria by Continuous Trading of Few Long-lived Securities," Econometrica, Econometric Society, vol. 53(6), pages 1337-56, November.
  14. Bewley, Truman F., 1972. "Existence of equilibria in economies with infinitely many commodities," Journal of Economic Theory, Elsevier, vol. 4(3), pages 514-540, June.
  15. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
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