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General equilibrium with endogenous uncertainty and default

Chichilnisky, Graciela; Wu, Ho-Mou

In this paper we study the introduction of new assets which are oftenly observed to be defined in expected values rather than state by state, called the Arrow-Lind-Malinvaud (ALM) assets. We demonstrate that individual default emerges naturally in an economy where such ALM assets are introduced without completing all contingency markets. We further provide conditions under which individual default is propagated endogenously into a collective risk of widespread default in general equilibrium.

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Academic Units
Economics
Publisher
Department of Economics, Columbia University
Series
Department of Economics Discussion Papers, 0506-29
Published Here
March 28, 2011

Notes

May 2006

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