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. To illustrate this method, we apply it to analyzing the allocative, price, and welfare effects of introducing a new derivative security. We find that the introduction of any derivative will raise the value of the risky asset relative to bonds

The National Bureau of Economic Research, Inc. (NBER) presents an abstract for the February 2001 paper entitled "Asymptotic Methods for Asset Market Equilibrium Analysis," by Kenneth L. Judd and Sy-Ming Guu. The article discusses findings that show that the introduction of any derivative security will raise the value of the risky asset relative to bonds. Users may purchase the full text of the paper online.

Handbook of Macroeconomics Volumes 2A and 2B surveys major advances in macroeconomic scholarship since the publication of Volume 1 (1999), carefully distinguishing between empirical, theoretical, methodological, and policy issues, including fiscal, monetary, and regulatory policies to deal with crises, unemployment, and economic growth. As this volume shows, macroeconomics has undergone a profound change since the publication of the last volume, due in no small part to the questions thrust into the spotlight by the worldwide financial crisis of 2008. With contributions from the world's leading macroeconomists, its reevaluation of macroeconomic scholarship and assessment of its future constitute an investment worth making. - Serves a double role as a textbook for macroeconomics courses and as a gateway for students to the latest research - Acts as a one-of-a-kind resource as no major collections of macroeconomic essays have been published in the last decade - Builds upon Volume 1 by using its section headings to illustrate just how far macroeconomic thought has evolved

Sample Text

Demonstrate theoretically the possibility that the financial market, albeit incomplete, has equilibrium and that this equilibrium is efficient has been an important topic at the frontier of the research on general equilibrium for financial markets. This paper proposes to make a critical survey of the literature on general equilibrium with incomplete financial markets that discusses in which condition it is possible to demonstrate the asymptotic properties. In particular, we examine whether each equilibrium that ensues with additions of securities are or not constrained Pareto optimum. The constrained optimality analysis runs into the difficulty that it is hard to proceed sensibly without tackling the difficult problem of the determination of the asset structure. With incomplete markets, the asset structures matters. The paper offers and solves an example where a structure of Arrow securities relates to the asymptotic inefficiency.