Solving General Equilibrium Models with Incomplete Markets and Many Financial Assets

40 Pages Posted: 27 Jan 2011

See all articles by Martin D.D. Evans

Martin D.D. Evans

Georgetown University - Department of Economics

Viktoria V. Hnatkovska

University of British Columbia (UBC) - Department of Economics

Date Written: March 16, 2007

Abstract

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.

Keywords: Portfolio Choice, Dynamic Stochastic General Equilibrium Models, Incomplete Markets, Numerical Solution Methods

JEL Classification: C68, D52, G11

Suggested Citation

Evans, Martin D.D. and Hnatkovska, Viktoria V., Solving General Equilibrium Models with Incomplete Markets and Many Financial Assets (March 16, 2007). Available at SSRN: https://ssrn.com/abstract=1747767 or http://dx.doi.org/10.2139/ssrn.1747767

Martin D.D. Evans (Contact Author)

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
202-687-1570 (Phone)
202-687-6102 (Fax)

Viktoria V. Hnatkovska

University of British Columbia (UBC) - Department of Economics ( email )

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada

HOME PAGE: http://faculty.arts.ubc.ca/vhnatkovska/

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