The Korean Economic Review
Equilibrium in Financial Markets with Market Frictions
Guang Sug Hahn / Dong Chul WonYear 2007Vol. 23No. 2
Redundant assets have complicated implications to equilibrium, whenavailable asset markets are subject to market frictions. We show theexistence of equilibrium in two-period asset markets where portfolio choicesare subject to portfolio constraints. The main consequences of the paper aredifferentiated from the literature in two respects. First, asset markets areallowed to have a large multiplicity of alternative portfolios in equilibrium. Aportfolio decomposition technique is developed to resolve the largemultiplicity problem. Second, we provide a survival condition with assetmarkets for the existence of equilibrium. Remarkably, this cannot bedispensed within the constrained asset markets, even when the endowment ofgoods is in the interior of the consumption set for each agent.