Multiplicity in General Financial Equilibrium with Portfolio Constraints

Suleyman Basak, David Cass, Juan Manuel Licari and Anna Pavlova

No 5804, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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: asset pricing; financial equilibrium; indeterminacy; multiple equilibria; portfolio constraints (search for similar items in EconPapers)
JEL-codes: D52 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-fin
Date: 2006-08
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Journal Article: Multiplicity in general financial equilibrium with portfolio constraints (2008)
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