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Dynamic competitive economies with complete markets and collateral constraints


Gottardi, Piero; Kübler, Felix (2012). Dynamic competitive economies with complete markets and collateral constraints. NCCR 750, University of Zurich.

Abstract

In this paper we examine the competitive equilibria of a dynamic stochastic economywith complete markets. We show that the completeness of the market requires both theset of asset payo¤s and collateral levels to be su¢ ciently rich, so as to allow to decentral-ize the equilibrium allocations obtained in Arrow-Debreu markets subject to a series ofappropriate limited pledgeability constraints. We provide then su¢ cient conditions forequilibria to be Pareto e¢ cient and show that when collateral is scarce equilibria are alsooften constrained ine¢ cient, in the sense that imposing tighter borrowing restrictionscan make everybody in the economy better o¤.We derive su¢ cient conditions for the existence of Markov equilibria and show thatthey often have ?nite support. The model is then tractable and its equilibria can becomputed with arbitrary accuracy. We carry out on this basis a quantitative assessmentof the risk sharing and e¢ ciency properties of equilibria.

Abstract

In this paper we examine the competitive equilibria of a dynamic stochastic economywith complete markets. We show that the completeness of the market requires both theset of asset payo¤s and collateral levels to be su¢ ciently rich, so as to allow to decentral-ize the equilibrium allocations obtained in Arrow-Debreu markets subject to a series ofappropriate limited pledgeability constraints. We provide then su¢ cient conditions forequilibria to be Pareto e¢ cient and show that when collateral is scarce equilibria are alsooften constrained ine¢ cient, in the sense that imposing tighter borrowing restrictionscan make everybody in the economy better o¤.We derive su¢ cient conditions for the existence of Markov equilibria and show thatthey often have ?nite support. The model is then tractable and its equilibria can becomputed with arbitrary accuracy. We carry out on this basis a quantitative assessmentof the risk sharing and e¢ ciency properties of equilibria.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 January 2012
Deposited On:30 Apr 2012 07:43
Last Modified:07 Dec 2017 13:55
Series Name:NCCR
Number of Pages:44
Official URL:http://www.zora.uzh.ch/61977/
Related URLs:http://www.nccr-finrisk.uzh.ch/media/pdf/wp/WP750_D3.pdf
Other Identification Number:merlin-id:6939

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