Asymptotic methods for asset market equilibrium analysis

Sy-Ming Guu and Kenneth Judd
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Sy-Ming Guu: Department of Industrial Engineering, Yuan-Ze University, Nei-Li, Taoyuan, Taiwan 32026, R.O.C.

Economic Theory, 2001, vol. 18, issue 1, 127-157

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. We use this method to analyze the allocative and welfare effects of introducing a new security. We find that adding any nontrivial derivative security will raise the price of the risky security relative to the bond when risks are small.

Keywords: General equilibrium; Incomplete asset markets; Perturbation methods; Bifurcation methods. (search for similar items in EconPapers)
JEL-codes: C63 D52 G12 (search for similar items in EconPapers)
Date: 2001-04-11
Note: Received: April 1, 2000; revised version: January 10, 2001
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