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Computing Equilibria in Finance Economies

  • P.J.J. Herings

    (University of Maastricht)

  • F. Kubler

    (Stanford University)

The general equilibrium model with incomplete asset markets provides a unified framework for many problems in finance and macroeconomics. In its simplest version with only two time periods and a single physical commodity the model is ideally suited for the study of problems in cross sectional asset pricing and portfolio theory. In this paper we develop a homotopy algorithm to approximate equilibria in these ''finance economies''. Since the algorithm is tailor made for finance economies, the number of nonlinear equations that has to be solved for, and therefore the computing time,is an order of magnitude smaller than that of existing general purpose algorithms.The algorithm is shown to be generically convergent. We implement the algorithm using HOMPACK. To illustrate its performance, we present various numerical examples and report running times.

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Paper provided by EconWPA in its series GE, Growth, Math methods with number 0205003.

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Length: 16 pages
Date of creation: 31 Oct 2001
Date of revision:
Handle: RePEc:wpa:wuwpge:0205003
Note: Type of Document - pdf.format; pages: 16
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
  2. Hens,Thorsten, 1991. "Structure of general equilibrium models with incomplete markets and a single consumption good," Discussion Paper Serie A 353, University of Bonn, Germany.
  3. Jean-Jacques Herings, P., 1997. "A globally and universally stable price adjustment process," Journal of Mathematical Economics, Elsevier, vol. 27(2), pages 163-193, March.
  4. Schmedders, Karl, 1998. "Computing equilibria in the general equilibrium model with incomplete asset markets," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1375-1401, August.
  5. Herings,O. Jean-Jacques & Kubler,Felix, 2000. "The Robustness of CAPM-A Computational Approach," Research Memorandum 035, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  6. Demarzo, Peter M. & Eaves, B. Curtis, 1996. "Computing equilibria of GEI by relocalization on a Grassmann manifold," Journal of Mathematical Economics, Elsevier, vol. 26(4), pages 479-497.
  7. Herings, P.J.J. & Kubler, F., 1999. "The Robustness of the CAPM - A Computational Approach," Discussion Paper 1999-54, Tilburg University, Center for Economic Research.
  8. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  9. Herbert E. Scarf, 1967. "The Approximation of Fixed Points of a Continuous Mapping," Cowles Foundation Discussion Papers 216R, Cowles Foundation for Research in Economics, Yale University.
  10. Eaves, B. Curtis & Schmedders, Karl, 1999. "General equilibrium models and homotopy methods," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1249-1279, September.
  11. repec:cup:cbooks:9780521265140 is not listed on IDEAS
  12. Brown, Donald J & DeMarzo, Peter M & Eaves, B Curtis, 1996. "Computing Equilibria When Asset Markets Are Incomplete," Econometrica, Econometric Society, vol. 64(1), pages 1-27, January.
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