Multiplicity in General Financial Equilibrium with Portfolio Constraints, Second Version

Suleyman Basak, David Cass, Juan Licari () and Anna Pavlova
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Juan Licari: Department of Economics, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: This paper explores the role of portfolio constraints in generating multiplicity of equilibrium. We present a simple financial market economy with two goods and two households, households who face constraints on their ability to take unbounded positions in risky stocks. Absent such constraints, equilibrium allocation is unique and is Pareto efficient. With one portfolio constraint in place, the efficient equilibrium is still possible; however, additional inefficient equilibria in which the constraint is binding may emerge. We show further that with portfolio constraints cum incomplete markets, there may be a continuum of equilibria; adding incomplete markets may lead to real indeterminacy.

Keywords: Multiple equilibria; asset pricing; portfolio constraints; indeterminacy; financial equilibrium (search for similar items in EconPapers)
JEL-codes: D52 G12 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2006-03-01, Revised 2006-07-17
New Economics Papers: this item is included in nep-cfn, nep-dge, nep-fin and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:06-020

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