We introduce a new equilibrium concept and study its efficiency and asset pricing implications for the environment analyzed by Kehoe and Levine (1993) and Kocherlakota (1996). Our equilibrium concept has complete markets and endogenous solvency constraints. These solvency constraints prevent default at the cost of reducing risk sharing. We show versions of the welfare theorems. We characterize the preferences and endowments that lead to equilibria with incomplete risk sharing. We compare the resulting pricing kernel with the one for economies without participation constraints: interest rates are lower and risk premia depend on the covariance of the idiosyncratic and aggregate shocks. Additionally, we show that asset prices depend only on the valuation of agents with substantial idiosyncratic risk.
MLA
Alvarez, Fernando, and Urban J. Jermann. “Efficiency, Equilibrium, and Asset Pricing with Risk of Default.” Econometrica, vol. 68, .no 4, Econometric Society, 2000, pp. 775-797, https://doi.org/10.1111/1468-0262.00137
Chicago
Alvarez, Fernando, and Urban J. Jermann. “Efficiency, Equilibrium, and Asset Pricing with Risk of Default.” Econometrica, 68, .no 4, (Econometric Society: 2000), 775-797. https://doi.org/10.1111/1468-0262.00137
APA
Alvarez, F., & Jermann, U. J. (2000). Efficiency, Equilibrium, and Asset Pricing with Risk of Default. Econometrica, 68(4), 775-797. https://doi.org/10.1111/1468-0262.00137
The Executive Committee of the Econometric Society has approved an increase in the submission fees for papers in Econometrica. Starting January 1, 2025, the fee for new submissions to Econometrica will be US$125 for regular members and US$50 for student members.
By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device. Cookies are used to optimize your experience and anonymously analyze website performance and traffic.