Multiplicity in general financial equilibrium with portfolio constraints
Journal
Journal of Economic Theory
Subject
Finance
Publishing details
Authors / Editors
Basak S; Cass D; Licari J M; Pavlova A
Biographies
Publication Year
2008
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.
Keywords
Multiple equilibria; Asset pricing; Portfolio constraints; Indeterminacy; General financial equilibrium (GFE)
Publication Research Centre
Institute of Finance and Accounting
Available on ECCH
No
