DP5804 Multiplicity in General Financial Equilibrium with Portfolio Constraints
|Author(s):||Suleyman Basak, David Cass, Juan Manuel Licari, Anna Pavlova|
|Publication Date:||August 2006|
|Keyword(s):||asset pricing, financial equilibrium, indeterminacy, multiple equilibria, portfolio constraints|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=5804|
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.