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Equilibria in exchange economies with financial constraints: Beyond the Cass Trick

  • V.F. Martins-da-Rocha

    (CEREMADE)

  • L. Triki

    (CERMSEM)

We consider an exchange economy under incomplete financial markets with purely financial securities and finitely many agents. When portfolios are not constrained, Cass (1984), Duffie (1987) and Florenzano--Gourdel (1992) proved that arbitrage-free security prices fully characterize equilibrium security prices. This result is based on a trick initiated by Cass (1984) in which one unconstrained agent behaves as if he were in complete markets. This approach is unsatisfactory since it is asymmetric and no more valid when every agent is subject to frictions. We propose a new and symmetric approach to prove that arbitrage-free security prices still fully characterize equilibrium security prices in the more realistic situation where the financial market is constrained by convex restrictions, provided that financial markets are collectively frictionless.

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File URL: http://128.118.178.162/eps/mic/papers/0503/0503013.pdf
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Paper provided by EconWPA in its series Microeconomics with number 0503013.

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Length: 18 pages
Date of creation: 29 Mar 2005
Date of revision:
Handle: RePEc:wpa:wuwpmi:0503013
Note: Type of Document - pdf; pages: 18
Contact details of provider: Web page: http://128.118.178.162

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  1. Duffie, Darrell & Shafer, Wayne, 1985. "Equilibrium in incomplete markets: I : A basic model of generic existence," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 285-300, June.
  2. Cass, David, 2006. "Competitive equilibrium with incomplete financial markets," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 384-405, August.
  3. Triki, Leila & Martins-da-Rocha, Victor-Filipe, 2004. "Equilibria in exchange economies with financial constraints: Beyond the Cass Trick," Economics Papers from University Paris Dauphine 123456789/6894, Paris Dauphine University.
  4. Florenzano, Monique & Gourdel, Pascal, 1994. "T-period economies with incomplete markets," Economics Letters, Elsevier, vol. 44(1-2), pages 91-97.
  5. Monique Florenzano, 2007. "General equilibrium," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00250167, HAL.
  6. Cass, David & Siconolfi, Paolo & Villanacci, Antonio, 2001. "Generic regularity of competitive equilibria with restricted participation," Journal of Mathematical Economics, Elsevier, vol. 36(1), pages 61-76, September.
  7. Duffie, Darrell, 1987. "Stochastic equilibria with incomplete financial markets," Journal of Economic Theory, Elsevier, vol. 41(2), pages 405-416, April.
  8. Rahi,Rohit, 1992. "Partially revealing rational expectations equilibria with nominal assets," Discussion Paper Serie A 387, University of Bonn, Germany.
  9. Werner, Jan, 1985. "Equilibrium in economies with incomplete financial markets," Journal of Economic Theory, Elsevier, vol. 36(1), pages 110-119, June.
  10. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  11. Bergstrom, Theodore C., 1976. "How to discard `free disposability' - at no cost," Journal of Mathematical Economics, Elsevier, vol. 3(2), pages 131-134, July.
  12. Helmut Elsinger & Martin Summer, 2001. "Arbitrage and Optimal Portfolio Choice with Financial Constraints," Working Papers 49, Oesterreichische Nationalbank (Austrian Central Bank).
  13. Luttmer, Erzo G J, 1996. "Asset Pricing in Economies with Frictions," Econometrica, Econometric Society, vol. 64(6), pages 1439-67, November.
  14. Polemarchakis, H. M. & Siconolfi, P., 1997. "Generic existence of competitive equilibria with restricted participation," Journal of Mathematical Economics, Elsevier, vol. 28(3), pages 289-311, October.
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