General equilibrium with endogenous uncertainty and default

Graciela Chichilnisky () and Ho-Mou Wu ()
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Ho-Mou Wu: National Taiwan University - College of Management

No 0506-29, Discussion Papers from Columbia University, Department of Economics

Abstract: In this paper we study the introduction of new assets which are oftenly observed to be defined in expected values rather than state by state, called the Arrow-Lind-Malinvaud (ALM) assets. We demonstrate that individual default emerges naturally in an economy where such ALM assets are introduced without completing all contingency markets. We further provide conditions under which individual default is propagated endogenously into a collective risk of widespread default in general equilibrium.

Date: 2006
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Journal Article: General equilibrium with endogenous uncertainty and default (2006)
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