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Multiplicity in General Financial Equilibrium with Portfolio Constraints, Second Version

Author

Listed:
  • Suleyman Basak

    (London Business School and CEPR, Institute of Finance and Accounting)

  • David Cass

    (Department of Economics, University of Pennsylvania)

  • Juan Manuel Licari

    (Department of Economics, University of Pennsylvania)

  • Anna Pavlova

    (London Business School and CEPR, Institute of Finance and Accounting)

Abstract

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.

Suggested Citation

  • Suleyman Basak & David Cass & Juan Manuel Licari & Anna Pavlova, 2006. "Multiplicity in General Financial Equilibrium with Portfolio Constraints, Second Version," PIER Working Paper Archive 06-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 17 Jul 2006.
    • Handle: RePEc:pen:papers:06-020
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    References listed on IDEAS

    as
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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