Equilibrium Models With Singular Asset Prices

Ioannis Karatzas, John P. Lehoczky and Steven E. Shreve

Mathematical Finance, 1991, vol. 1, issue 3, 11-29

Abstract: General equilibrium models in which economic agents have finite marginal utility from consumption at the origin lead to financial assets having continuous prices with singular components. In particular, there is no bona fide “interest rate” in such models, although asset prices can be determined by equilibrium considerations (and uniquely, up to the formation of mutual funds). the singularly continuous processes in question charge precisely the set of time points at which some agent “drops out” of the economy, or “comes back” into it, between intervals of zero consumption. Not surprisingly, these processes are governed by local time.

Date: 1991
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