A Method for Solving General Equilibrium Models with Incomplete Markets and Many Financial Assets

45 Pages Posted: 4 Oct 2005 Last revised: 12 Sep 2008

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: September 2, 2008

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 and for different degrees of risk aversion the standard accuracy tests confirm the effectiveness of our method.

Keywords: Portfolio Choice, Incomplete Markets, Time-Varying Risk Premia, Perturbation Methods, Projection Methods

JEL Classification: C68, D52, G11

Suggested Citation

Evans, Martin D.D. and Hnatkovska, Viktoria V., A Method for Solving General Equilibrium Models with Incomplete Markets and Many Financial Assets (September 2, 2008). Available at SSRN: https://ssrn.com/abstract=815285 or http://dx.doi.org/10.2139/ssrn.815285

Martin D.D. Evans

Georgetown University - Department of Economics ( email )

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

Viktoria V. Hnatkovska (Contact Author)

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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