Existence of Equilibrium and Price Adjustments in a Finance Economy with Incomplete Markets

CentER Discussion Paper No. 2003-79

21 Pages Posted: 16 Jun 2004

See all articles by Dolf Talman

Dolf Talman

Tilburg University - Department of Econometrics & Operations Research

Jacco Thijssen

University of York - The York Management School

Date Written: 2003

Abstract

In this paper, the standard two-period general equilibrium model with incomplete financial markets is considered. First, existence of equilibrium is proved using a stationary point argument on the set of no-arbitrage prices. Prices are normalized with respect to the market portfolio. The proof does not use the commonly applied normalization on the unit sphere or truncation of the set of prices. It is shown that there exists a connected set from an arbitrary price vector to an equilibrium. The path can be followed by a simplicial algorithm for stationary point problems on polytopes. It is argued that this algorithm can be interpreted as originating from a market-maker maximizing the value of excess demand.

Keywords: General equilibrium, incomplete markets, price adjustments

JEL Classification: C62, C63, C68, D52, D58

Suggested Citation

Talman, Dolf J. J. and Thijssen, Jacco, Existence of Equilibrium and Price Adjustments in a Finance Economy with Incomplete Markets (2003). CentER Discussion Paper No. 2003-79, Available at SSRN: https://ssrn.com/abstract=556364 or http://dx.doi.org/10.2139/ssrn.556364

Dolf J. J. Talman (Contact Author)

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands
+31 13 466 2346 (Phone)

Jacco Thijssen

University of York - The York Management School ( email )

Sally Baldwin Buildings
Heslington
York, North Yorkshire YO10 5DD
United Kingdom

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