Asymptotic methods for asset market equilibrium analysis
- Cite this article as:
- Judd, K. & Guu, SM. Econ Theory (2001) 18: 127. doi:10.1007/PL00004130
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General equilibrium analysis is difficult when asset markets are incomplete. We make the simplifying assumption that uncertainty is small and use bifurcation methods to compute Taylor series approximations for asset demand and asset market equilibrium. A computer must be used to derive these approximations since they involve large amounts of algebraic manipulation. We use this method to analyze the allocative and welfare effects of introducing a new security. We find that adding any nontrivial derivative security will raise the price of the risky security relative to the bond when risks are small.