Multiplicity in General Financial Equilibrium with Portfolio Constraints
London Business School; London Business School; Centre for Economic Policy Research (CEPR)
London Business School; Centre for Economic Policy Research (CEPR)
David Cass (deceased)
Juan Manuel Licari
University of Pennsylvania - Department of Economics
CEPR Discussion Paper No. 5804
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.
Number of Pages in PDF File: 38
Keywords: Multiple equilibria, asset pricing, portfolio constraints, indeterminacy, financial equilibrium
JEL Classification: D52, G12
Date posted: October 11, 2006
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