Abstract - Incomplete-Market Equilibria Solved Recursively on an Event Tree

We develop a method that allows one to compute incomplete-market equilibria routinely for
Markovian equilibria (when they exist). The main difficulty to be overcome arises from the set
of state variables. There are, of course, exogenous state variables driving the economy but, in an
incomplete market, there are also endogenous state variables, which introduce path dependence.
We write on an event tree the system of all first-order conditions of all times and states and
solve recursively for state prices, which are dual variables. We illustrate this “dual” method and
show its many practical advantages by means of several examples.

Bernard Dumas
20.Oct 2009

Back to overview