Computing Equilibria in Stochastic Finance Economies

  • Authors:

  • Felix Kubler;Karl Schmedders

  • Affiliations:

  • Department of Economics, Yale University, New Haven, CT, U.S.A.;Hoover Institution, Stanford University, Mailing address: Department of EES/OR, Stanford University, Stanford, CA 94305-4023, U.S.A. karl@or.stanford.edu

  • Venue:
  • Computational Economics - Computational Studies at Stanford
  • Year:
  • 2000

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Abstract

We describe a homotopy algorithm for the computation of equilibriain Stochastic Finance Economies. The algorithm solves a nonlinearsystem of equations consisting of the first-order conditions of theagents' utility maximization problems and market-clearing conditions.Moreover, we discuss the use of a straightforward homotopy approach for localcomparative statics. Using our methods we evaluate price, volatility,and welfare effects of options in incomplete asset markets.