General Equilibrium with Endogenous Uncertainty and Default

37 Pages Posted: 7 Mar 2010

See all articles by Graciela Chichilnisky

Graciela Chichilnisky

Columbia University

Ho-Mou Wu

National Taiwan University - College of Management

Multiple version iconThere are 2 versions of this paper

Date Written: May 2006

Abstract

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.

Keywords: Default, financial innovation, individual risk, collective risk, endogenous uncertainty

Suggested Citation

Chichilnisky, Graciela and Wu, Ho-Mou, General Equilibrium with Endogenous Uncertainty and Default (May 2006). Available at SSRN: https://ssrn.com/abstract=1082541 or http://dx.doi.org/10.2139/ssrn.1082541

Graciela Chichilnisky (Contact Author)

Columbia University ( email )

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HOME PAGE: http://www.chilchilnisky.com

Ho-Mou Wu

National Taiwan University - College of Management ( email )

Department and Graduate Institute of Finance
College of Management
Taipei 106
Taiwan

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