TY  - JOUR
AU  - Dumas,Bernard
AU  - Lyasoff,Andrew
TI  - Incomplete-Market Equilibria Solved Recursively on an Event Tree
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14629
PY  - 2008
Y2  - December 2008
UR  - http://www.nber.org/papers/w14629
L1  - http://www.nber.org/papers/w14629.pdf
N1  - Author contact info:
Bernard Dumas
INSEAD
boulevard de Constance
77305 Fontainebleau Cedex
FRANCE
Tel: +33 1 60 72 43 73
Fax:  +33 1 60 72 40 50
E-Mail: bernard.dumas@insead.edu

Andrew Lyasoff
Boston University
School of Management
595 Commonwealth Ave., Room 645A
Boston, MA 02215
E-Mail: alyasoff@bu.edu
AB  - We develop a method that allows one to compute incomplete-market equilibria routinely for Markovian equilibria (when they exist). The main difficulty to be overcome arises from the set of state variables. There are, of course, exogenous state variables driving the economy but, in an incomplete market, there are also endogenous state variables, which introduce path dependence. We write on an event tree the system of all first-order conditions of all times and states and solve recursively for state prices, which are dual variables. We illustrate this "dual" method and show its many practical advantages by means of several examples.
ER  -