EQUILIBRIUM IN FINANCIAL MARKETS WITH MARKET FRICTIONS
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초록
Redundant assets have complicated implications to equilibrium, when available asset markets are subject to market frictions. We show the existence of equilibrium in two-period asset markets where portfolio choices are subject to portfolio constraints. The main consequences of the paper are differentiated from the literature in two respects. First, asset markets are allowed to have a large multiplicity of alternative portfolios in equilibrium. A portfolio decomposition technique is developed to resolve the large multiplicity problem. Second, we provide a survival condition with asset markets for the existence of equilibrium. Remarkably, this cannot be dispensed within the constrained asset markets, even when the endowment of goods is in the interior of the consumption set for each agent.
Abstract
Redundant assets have complicated implications to equilibrium, when available asset markets are subject to market frictions. We show the existence of equilibrium in two-period asset markets where portfolio choices are subject to portfolio constraints. The main consequences of the paper are differentiated from the literature in two respects. First, asset markets are allowed to have a large multiplicity of alternative portfolios in equilibrium. A portfolio decomposition technique is developed to resolve the large multiplicity problem. Second, we provide a survival condition with asset markets for the existence of equilibrium. Remarkably, this cannot be dispensed within the constrained asset markets, even when the endowment of goods is in the interior of the consumption set for each agent.
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