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Asymptotic Methods for Asset Market Equilibrium Analysis

  • Kenneth L. Judd
  • Sy-Ming Guu

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8135.

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Date of creation: Feb 2001
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Publication status: published as Judd, Kenneth L. and Sy-Ming Guu. “Asymptotic Methods for Asset Market Equilibrium Analysis." Economic Theory 18 (2001): 127-157.
Handle: RePEc:nbr:nberwo:8135
Note: AP
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  12. Gaspar, Jess & L. Judd, Kenneth, 1997. "Solving Large-Scale Rational-Expectations Models," Macroeconomic Dynamics, Cambridge University Press, vol. 1(01), pages 45-75, January.
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