Asymptotic Methods for Asset Market Equilibrium Analysis
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. To illustrate this method, we apply it to analyzing the allocative, price, and welfare effects of introducing a new derivative security. We find that the introduction of any derivative will raise the value of the risky asset relative to bonds.
|Date of creation:||Feb 2001|
|Date of revision:|
|Publication status:||published as Judd, Kenneth L. and Sy-Ming Guu. “Asymptotic Methods for Asset Market Equilibrium Analysis." Economic Theory 18 (2001): 127-157.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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