Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Equilibrium in Constrained Financial Markets

Vol.31, No.4, December , 1–40



  •   (POSTECH)

  •   (Ajou University)

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Abstract  

Redundant assets give rise to peculiar portfolios, called `link portfolios,' under portfolio constraints. Link portfolios are jointly spanned by constrained null-income portfolios and form a linear subspace. The paper provides a general methodology for showing the existence of equilibrium under portfolio constraints by building two theoretical pillars to deal with link portfolios. The two pillars consist of the fundamental theorem of portfolio decomposition and the allocational equivalence between the original economy and the artificial economy built from projecting away link portfolios from the portfolio constraints. Investigating the existence of equilibrium in constrained financial markets boils down to finding a sufficient condition for the fundamental theorem of portfolio constraints to hold. The sufficient condition of the paper is general enough to encompass other sufficient conditions of the literature.


Keywords
   Incomplete Financial Markets, Portfolio Constraints, Financial Derivatives, Link Portfolios, Portfolio Decomposition, Equilibrium

JEL classification codes
   G12, D52, C62, G11
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