Incomplete-Market Equilibria Solved Recursively on an Event Tree

Bernard Dumas () and Andrew Lyasoff
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Andrew Lyasoff: Boston University

No 08-49, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We develop a method that allows one to compute incomplete-market equilibria routinely for Markovian equilibria (when they exist). The main difficulty to be overcome arises from the set of state variables. There are, of course, exogenous state variables driving the economy but, in an incomplete market, there are also endogenous state variables, which introduce path dependence. We write on an event tree the system of all first-order conditions of all times and states and solve recursively for state prices, which are dual variables. We illustrate this “dual” method and show its many practical advantages by means of several examples.

Keywords: incomplete market; financial-market equilibrium; computation; recursive methods (search for similar items in EconPapers)
JEL-codes: C63 C68 D52 D58 D91 G11 G12 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2008-12
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Incomplete-Market Equilibria Solved Recursively on an Event Tree (2012)
Working Paper: Incomplete-Market Equilibria Solved Recursively on an Event Tree (2009)
Working Paper: Incomplete-Market Equilibria Solved Recursively on an Event Tree (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0849

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