Computing Equilibria in Finance Economies

P.J.J. Herings*, F. Kubler

*Corresponding author for this work

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The general equilibrium model with incomplete asset markets is ideally suited for the study of problems in cross-sectional asset pricing and portfolio theory. In this paper, we develop a homotopy algorithm to approximate equilibria in these models. Since the algorithm is tailor made for so-called finance economies, the number of nonlinear equations that has to be solved for, and therefore the computing time, is an order of magnitude smaller than that of existing general-purpose algorithms. The algorithm is shown to be generically convergent. We implement the algorithm using HOMPACK. To illustrate its performance, we present various numerical examples and report running times.
Original languageEnglish
Pages (from-to)637-646
JournalMathematics of Operations Research
Publication statusPublished - 1 Jan 2002

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