Assume that atomic (Arrow-Debreu) securities are traded in this economy. One unit of ’G security’ sells at time 0 at a price qG and pays one unit of consumption at time 1 if state ’G’ occurs and nothing otherwise. One unit of ’F security’ sells at time 0 at a price qF and pays one unit of consumption at time 1 if state ’F’ occurs and nothing otherwise. One unit of ’B security’ sells at time 0 at a price qB and pays one unit of consumption in state ’B’ only.
1. Write down the consumer’s budget constraint for all times and states, and define a Market Equilibrium in this economy. Is there any trade of atomic (Arrow-Debreu) securities possible in this economy?
2. Write down the Lagrangian for the consumer’s optimisation problem, find the first order necessary conditions, and characterise the equilibrium (i.e., compute the optimal allocations and prices defined in the equilibrium).
3. At the equilibrium, calculate the forward price and risk premium for each atomic security. What do your results suggest about the consumers’ preference?Suppose that instead of atomic (Arrow-Debreu) securities there are three linearly independent securities, a riskless bond, a stock, and a one-period put option on this stock available for trade in this economy. The riskless bond pays 1 apple in every state, the stock pays 2, 1 and 0 apples in G, F and B, respectively. The put option has a strike price of 1.
4. Write down the budget constraint for each consumer using the newly available securities.
5. Write down the Lagrangian for the consumer’s optimisation problem, find the first order necessary conditions, and characterise the equilibrium (i.e., compute equilibrium allocations and prices of the newly available securities).
6. Now, price the newly available securities using the atomic prices from part 2. Comment on your results in light of the arbitrage-free markets.
The post Arrow-Debreu Economy appeared first on Homeworkaider.
What Students Are Saying About Us
.......... Customer ID: 12*** | Rating: ⭐⭐⭐⭐⭐"Honestly, I was afraid to send my paper to you, but you proved you are a trustworthy service. My essay was done in less than a day, and I received a brilliant piece. I didn’t even believe it was my essay at first 🙂 Great job, thank you!"
.......... Customer ID: 11***| Rating: ⭐⭐⭐⭐⭐
"This company is the best there is. They saved me so many times, I cannot even keep count. Now I recommend it to all my friends, and none of them have complained about it. The writers here are excellent."
"Order a custom Paper on Similar Assignment at essayfount.com! No Plagiarism! Enjoy 20% Discount!"
