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A Simple Method for Computing Equilibria when Asset Markets Are Incomplete

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  • Wei Ma

    (Department of Economics, University of Pretoria)

Abstract

The problem of computing equilibria for general equilibrium models with incomplete real asset markets, or GEI models for the sake of brevity, is reconsidered. It is shown here that the rank-dropping behavior of the asset return matrix could be dealt with in rather a simple fashion: We first compute its singular value decomposition, and then, through this decomposition, construct, by the introduction of a homotopy parameter, a new matrix such that it has constant rank before a desired equilibrium is reached. By adjunction of this idea to the homotopy method, a simpler constructive proof is obtained for the generic existence of GEI equilibria. For the purpose of computing these equilibria, from this constructive proof is then derived a path-following algorithm whose performance is finally demonstrated by means of two numerical examples.

Suggested Citation

  • Wei Ma, 2014. "A Simple Method for Computing Equilibria when Asset Markets Are Incomplete," Working Papers 201478, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201478
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    References listed on IDEAS

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    More about this item

    Keywords

    Incomplete asset markets; General equilibrium theory; Homotopy method;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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