38 Pages Posted: 11 Oct 2006
Date Written: August 2006
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.
Keywords: Multiple equilibria, asset pricing, portfolio constraints, indeterminacy, financial equilibrium
JEL Classification: D52, G12
Suggested Citation: Suggested Citation
Basak, Suleyman and Pavlova, Anna and Cass (deceased), David and Licari, Juan Manuel, Multiplicity in General Financial Equilibrium with Portfolio Constraints (August 2006). CEPR Discussion Paper No. 5804. Available at SSRN: https://ssrn.com/abstract=936721
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