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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 27, No. 4, pp.469-488
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2014
Received 01 Jul 2014 Revised 19 Oct 2014 Accepted 20 Oct 2014

Incomplete Markets with Endogenous Portfolio Constraints and Redundant Assets

Guangsug Hahn
Professor, Division of Humanities and Social Sciences, POSTECH, 77 Cheongam-Ro, Nam-Gu, Pohang, Gyeongbuk, 790-784, Korea, Tel: 82-54-279-2032 econhahn@postech.ac.kr

JEL Classification: C62, D51

Abstract

This paper shows that a competitive equilibrium exists in an exchange economy with incomplete financial markets where redundant assets are traded and the asset trading of each agent is subject to endogenous portfolio constraints. The set of budget-feasible portfolios need not be bounded in the presence of redundant assets. To address this problem, we impose the positive semi-independence condition on individual portfolio constraints.

Keywords:

Incomplete markets, Competitive equilibrium, Endogenous portfolio constraints, Redundant assets, Constrained arbitrage

Acknowledgments

This work was supported by the POSTECH Basic Science Research Institute Grant. I would like to thank two referees for valuable comments and Joon Yeop Kwon for his excellent research assistance. The usual disclaimer applies.

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