Solving General Equilibrium Models with Incomplete Markets and Many Financial Assets
Martin D.D. Evans
Georgetown University - Department of Economics
Viktoria V. Hnatkovska
University of British Columbia (UBC) - Department of Economics
March 16, 2007
This paper presents a new numerical method for solving stochastic general equilibrium models with dynamic portfolio choice over many financial assets. The method can be applied to models where there are heterogeneous agents, time-varying investment opportunity sets, and incomplete asset markets. We illustrate how the method is used by solving two versions of a two-country general equilibrium model with production and dynamic portfolio choice. We check the accuracy of our method by comparing the numerical solution to a complete markets version of the model against its known analytic properties. We then apply the method to an incomplete markets version where no analytic solution is available. In both models the standard accuracy tests confirm the effectiveness of our method.
Number of Pages in PDF File: 40
Keywords: Portfolio Choice, Dynamic Stochastic General Equilibrium Models, Incomplete Markets, Numerical Solution Methods
JEL Classification: C68, D52, G11working papers series
Date posted: January 27, 2011
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