Relaxing the sure-solvency conditions in temporary equilibrium models
type: Item
instance of: scholarly article
title: Relaxing the sure-solvency conditions in temporary equilibrium models
zbMATH Open document ID: 0578.90011
DOI: 10.1016/0022-0531(85)90027-4
author: Dale O. Stahl
published in: Journal of Economic Theory
publication date: 1985-01-01T00:00:00Z
review text: Temporary equilibrium models typically assume that each trader voluntarily chooses from only those futures contracts that involve zero probability of bankruptcy, and sometimes an institution imposes an additional sure-solvency constraint (from its viewpoint). The focus of this paper is on the robustness of the temporary equilibrium results to relaxation of these sure-solvency conditions. The model is a two-stage securities market in which a ''security'' is a contract to deliver a specified commodity in the second stage. Second- stage utility is a function of second-stage wealth. Preferences over bankrupt states are represented by extending the indirect utility function to negative wealth. In the first stage, a portfolio of securities is selected to maximize expected utility given first-stage security prices and probability distributions of second-stage commodity prices. When short sales are unimpeded by institutional constraints, a necessary condition for existence of temporary equilibrium is that the interior of the supports of the probability measures have a non-empty intersection. If, in addition, for all individuals the extended indirect utility approaches -\(\infty\) as wealth approaches -\(\infty\), then the usual temporary equilibrium results hold, even though the expected utility function may fail to be continuous. In contrast, if for some individual the indirect utility function is bounded below, then temporary equilibrium may fail to exist due to empty demand correspondences [an example is provided]. When short-sales are regulated by an institutional sure-solvency condition, it is well-known that temporary equilibrium exists even without overlapping supports. This paper shows that, provided institutional expectations are sufficiently broad, the institutional sure-solvency condition can be replaced by less stringent conditions such as a limit on the maximum loss or expected loss.
Mathematics Subject Classification ID: 91B50
Mathematics Subject Classification ID: 91B62
zbMATH DE Number: 3926587
zbMATH Keywords: futures contracts
zbMATH Keywords: bankruptcy
zbMATH Keywords: sure-solvency constraint
zbMATH Keywords: two-stage securities market
zbMATH Keywords: existence of temporary equilibrium
MaRDI profile type: Publication
full work available at URL: 0022-0531(85)90027-4
OpenAlex ID: W1983376231
cites work: Economic Efficiency in an Infinite Horizon Model
cites work: Temporary General Equilibrium in a Sequential Trading Model with Spot and Futures Transactions
cites work: Consequentialist demographic norms and parenting rights
cites work: Overlapping expectations and Hart's conditions for equilibrium in a securities model
cites work: Short-Selling, Default Risk and the Existence of Equilibrium in a Securities Model
cites work: Bankruptcies in Temporary Equilibrium Forward Markets With and Without Institutional Restrictions
cites work: Quasi-Equilibria in Markets with Non-Convex Preferences
description: scientific article; zbMATH DE number 3926587