Solving Incomplete Markets Models by Derivative Aggregation
نویسنده
چکیده
This article presents a novel computational approach to solving models with both uninsurable idiosyncratic and aggregate risk that uses projection methods, simulation and perturbation. The approach is shown to be both as efficient and as accurate as existing methods on a model based on Krusell and Smith (1998), for which prior solutions exist. The approach has the advantage of extending straightforwardly, and with reasonable computational cost, to models with a greater range of diversity between agents, which is demonstrated by solving both a model with heterogeneity in discount-rates and a lifecycle model with incomplete markets. JEL Codes: C63, E21, E32 Keyword: Idiosyncratic Risk, Business Cycles, Numerical Methods
منابع مشابه
Utility-Based Derivative Pricing in Incomplete Markets
In recent years various suggestions concerning contingent claim valuation in incomplete markets have been made. We argue that some of them can be naturally interpreted in terms of neutral derivative prices which occur if derivative demand and supply are balanced. Secondly, we introduce the notion of consistent derivative pricing which is a way of constructing market models that are consistent w...
متن کاملIncomplete Markets and Security Prices: Do Asset-Pricing Puzzles Result from Aggregation Problems?
This paper investigates Euler equations involving security prices and household-level consumption data. It provides a useful complement to many existing studies of consumptionbased asset pricing models that use a representative-agent framework, because the Euler equations under investigation hold even if markets are incomplete. It also provides a useful complement to simulation-based studies of...
متن کاملNonlinear Approximate Aggregation in Heterogeneous Agent Models
The paper deals with the computation of DSGE models with a large number (or continuum) of heterogenous agents and incomplete markets. Solving this model requires approximate aggregation, representing the cross-sectional distribution by a finite number of state variables. In the existing literature, people compute nonlinear solutions with a very low-dimensional state vector, or a high-dimensiona...
متن کاملIncomplete Markets
In reality, markets are incomplete, meaning that some payoffs cannot be replicated by trading in marketed securities. The classic no-arbitrage theory of valuation in a complete market, based on the unique price of a self-financing replicating portfolio, is not adequate for nonreplicable payoffs in incomplete markets. We focus on pricing over-the-counter derivative securities, surveying many pro...
متن کامل