Consider an economy populated by two agents, i = A, B. At time 0, the consumption...
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Consider an economy populated by two agents, i = A, B. At time 0, the consumption of agent i is given by c. Similarly, at time 1, in states, the consumption of agent i is given by cis. The two agents have the same preferences, U (cª) = −(10 − c′)² + Σñs[−(10 – ci₂)²], i = A, B. s=1 (1) There are two states of nature at time 1, and these two states are equally likely. There is a risk-free security and c₁ is the payoff of a traded portfolio. The per capita endowment at time zero and time 1 are given respectively by w = 5, w = z, wi (2,9), and w = (8, y). Finally, the payoff matrix is given by 1 X = 3 2 02 (2) 1. Do we have complete markets? Assume a no-trade equilibrium. What can we say about the values of z and y? Show your work. 2. Compute the equilibrium prices and returns of the three securities. 3. Do we have redundant securities? Why or why not? Consider an economy populated by two agents, i = A, B. At time 0, the consumption of agent i is given by c. Similarly, at time 1, in states, the consumption of agent i is given by cis. The two agents have the same preferences, U (cª) = −(10 − c′)² + Σñs[−(10 – ci₂)²], i = A, B. s=1 (1) There are two states of nature at time 1, and these two states are equally likely. There is a risk-free security and c₁ is the payoff of a traded portfolio. The per capita endowment at time zero and time 1 are given respectively by w = 5, w = z, wi (2,9), and w = (8, y). Finally, the payoff matrix is given by 1 X = 3 2 02 (2) 1. Do we have complete markets? Assume a no-trade equilibrium. What can we say about the values of z and y? Show your work. 2. Compute the equilibrium prices and returns of the three securities. 3. Do we have redundant securities? Why or why not?
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1 We do not have complete markets For markets to be complete the number of traded securities should ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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