In this paper we examine the effects of default and collateral on risk sharing. We assume that there is a large set of assets which all promise a risk less payoff but which distinguish themselves by their collateral requirements. In equilibrium agents default, the assets have different payoffs,...

There are a wide variety of theoretical general equilibrium models with incomplete security markets. In this paper we give a general recipe for using homotopy algorithm to compute equilibria in these models. In many models, taxes, transaction-costs or other market frictions introduce the...

We consider a Lucas asset-pricing model with heterogeneous agents, exogenous labor income, and a finite number of exogenous shocks. Although agents are infinitely lived, endowments and dividends are time-invariant functions of the exogenous shock alone and are thus restricted to lie in a...

Although equilibrium allocations in models with incomplete markets are generally not Pareto-efficient, it is often argued that quantitative welfare losses from missing assets are small when time horizons are long and shocks are transitory. In this paper, we use a computational analysis to show...

We consider an infinite horizon exchange economy with incomplete markets and default. As in Geanakoplos and Zame (1998) financial securities are traded if the promises associated with them are backed by collateral. The only collateral available in our economy are shares of Lucas trees. We prove...

We consider dynamic stochastic economies with heterogeneous agents and introduce the concept of uniformly self-justified equilibria (USJE)---temporary equilibria for which forecasts are best uniform approximations to a selection of the equilibrium correspondence. In a USJE, individuals'...

In general equilibrium models of financial markets, the capital asset pricing formula does not hold when agents have von Neumann–Morgenstern utility with constant relative risk aversion. In this paper we examine under which conditions on endowments and dividends the pricing formula provides a...

This paper develops a method to compute the equilibrium correspondence for exchangeeconomies with semi-algebraic preferences. Given a class of semi-algebraic exchange economiesparameterized by individual endowments and possibly other exogenous variables such as prefer-ence parameters or asset...

In this paper we present circumstances under which the possibility of high leverage can lead to widespread default and national crises. In models with incomplete markets, default and production, there will almost always be a mismatch between firm output across states of nature and asset...