Arbitrage and Equilibrium with Portfolio Constraints

Bernard Cornet and Ramu Gopalan ()

No 200911, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: We consider a multiperiod financial exchange economy with nominal assets and restricted participation, where each agent’s portfolio choice is restricted to a closed, convex set containing zero, as in Siconolfi (1989). Using an approach that dates back to Cass (1984, 2006) in the unconstrained case, we seek to isolate arbitrage-free asset prices that are also quasi-equilibrium or equilibrium asset prices. In the presence of such portfolio restrictions, we need to confine our attention to aggregate arbitrage-free asset prices, i.e., for which there is no arbitrage in the space of marketed portfolios. Our main result states that such asset prices are quasi-equilibrium prices under standard assumptions and then deduce that they are equilibrium prices under a suitable condition on the accessibility of payoffs by agents, i.e., every payoff that is attainable in the aggregate can be marketed through some agent’s portfolio set. This latter result extends previous work by Martins-da-Rocha and Triki (2005).

Keywords: Stochastic Financial exchange economies; Incomplete markets; Financial equilibrium; Constrained portfolios; Multiperiod models; Arbitrage-free asset prices (search for similar items in EconPapers)
JEL-codes: C62 D52 D53 G11 G12 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2009-12, Revised 2009-12
New Economics Papers: this item is included in nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Arbitrage and equilibrium with portfolio constraints (2010)
Working Paper: Arbitrage and equilibrium with portfolio constraints (2010)
Working Paper: Arbitrage and equilibrium with portfolio constraints (2010)
Working Paper: Arbitrage and equilibrium with portfolio constraints (2010)
Working Paper: Arbitrage and Equilibrium with Portfolio Constraints (2009)
Working Paper: Arbitrage and Equilibrium with Portfolio Constraints (2009)
Working Paper: Arbitrage and equilibrium with portofolio constraints (2009)
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