Incomplete-Market Equilibria Solved Recursively on an Event Tree

Bernard Dumas () and Andrew Lyasoff

No 14629, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: C63 C68 D52 D58 D91 G11 G12 (search for similar items in EconPapers)
Date: 2008-12
Note: AP EFG IFM TWP
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Citations: View citations in EconPapers (3)

Published as Incomplete-Market Equilibria Solved Recursively on an Event Tree BERNARD DUMAS, ANDREW LYASOFF† Article first published online: 12 SEP 2012 DOI: 10.1111/j.1540-6261.2012.01775.x © 2012 The American Finance Association Issue The Journal of Finance The Journal of Finance Volume 67, Issue 5, pages 1897–1941, October 2012

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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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