Implementing Arrow-Debreu Equilibria by Trading Infinitely-Lived Securities

FRB of Kansas City Research Working Paper No. 02-08

30 Pages Posted: 8 May 2003

See all articles by Kevin X. D. Huang

Kevin X. D. Huang

Federal Reserve Bank of Philadelphia; Vanderbilt University - College of Arts and Science - Department of Economics

Jan Werner

University of Minnesota - Twin Cities - Department of Economics

Date Written: December 2002

Abstract

We show that Arrow-Debreu equilibria with countably additive prices in infinite-time economy under uncertainty can be implemented by trading infinitely-lived securities in complete sequential markets under two different portfolio feasibility constraints: Wealth constraint, and essentially bounded portfolios. Sequential equilibria with no price bubbles implement Arrow-Debreu equilibria, while those with price bubbles implement Arrow-Debreu equilibria with transfers. Transfers are equal to price bubbles on initial portfolio holdings. Price bubbles arise in sequential equilibrium under the wealth constraint if some securities are in zero supply or negative prices are permitted, but cannot arise with essentially bounded portfolios.

Keywords: Arrow-Debreu Equilibrium, Security Markets Equilibrium Price Bubbles, Transfers

JEL Classification: D50, G12, E44

Suggested Citation

Huang, Kevin X. D. and Werner, Jan, Implementing Arrow-Debreu Equilibria by Trading Infinitely-Lived Securities (December 2002). FRB of Kansas City Research Working Paper No. 02-08. Available at SSRN: https://ssrn.com/abstract=386660 or http://dx.doi.org/10.2139/ssrn.386660

Kevin X. D. Huang (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

Jan Werner

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

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