Asymptotic Methods for Asset Market Equilibrium Analysis

Kenneth L. Judd () and Sy-Ming Guu

No 8135, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: General equilibrium analysis is difficult when asset markets are incomplete. We make the simplifying assumption that uncertainty is small and use bifurcation methods to compute Taylor series approximations for asset demand and asset market equilibrium. A computer must be used to derive these approximations since they involve large amounts of algebraic manipulation. To illustrate this method, we apply it to analyzing the allocative, price, and welfare effects of introducing a new derivative security. We find that the introduction of any derivative will raise the value of the risky asset relative to bonds.

JEL-codes: C63 D52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-fin and nep-fmk
Date: 2001-02
Note: AP
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