Existence and structure of stochastic equilibria with intertemporal substitution

We prove existence of an Arrow–Debreu equilibrium when agents’ preferences exhibit local substitution in the sense of Hindy, Huang, and Kreps (1992). Efficient allocations and supporting price functionals are identified and characterized. Under Hindy–Huang–Kreps preferences, equilibrium price processes are semimartingales for arbitrary endowments, but in general, they do not belong to the space suggested originally by Hindy and Huang (1992) due to an additional singular local time component. † Support of Deutsche Forschungsgemeinschaft through SFB 373, “Quantification and Simulation of Economic Processes”, is gratefully acknowledged. ‡ We would like to thank Darrel Duffie for suggesting a more general approach, and Ulrich Horst for helpful discussions. AMS 2000 subject classification. Primary 91B50; secondary 91B70 JEL subject classification. D51, D91