On trees and logs

DOI10.1016/J.JET.2003.05.001MaRDI QIDQ1877165zbMATH OpenOpenAlexFDO

Authors David Cass, Anna Pavlova

Publication date 16 August 2004

Published in Journal of Economic Theory (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1016/j.jet.2003.05.001

zbMATH Keywords

equilibrium theoryLucas tree modelnon-uniqueness of equilibriapeculiar financial equilibriumportfolio constraints

Mathematics Subject Classification ID

Review text

The authors critically examine the Lucas tree model (LT-model) in asset pricing theory extended to include heterogeneous agents and multiple goods. Dividend streams of the trees are specified in terms of a particular good; different trees pay out indifferent goods. Equilibrium implications of the LT-model are weighted against those of the benchmark real assets model (RA-model) in financial equilibrium theory. As a conclusion, the LT-model has certain embedded structure that makes it significantly different from the RA-model, and the goal of the paper is to highlight this structure and the implications it may lead to. In particular, specializing households' preferences to be additively separable (over time) as well log-linear, the authors show that for a large set of initial endowments, the LT-model, even with potentially complete financial markets, admits a peculiar financial equilibrium in which all stocks but one are redundant. Also it is investigated why the LT-model is so much at variance with RA-model, and new results are uncovered on uniqueness of financial equilibria. Portfolio constraints possible in LT-models but not in RA-model are discussed.

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Cites work

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• Generic inefficiency of stock market equilibrium when markets are incomplete
• scientific article; zbMATH DE number 1095739 (Why is no real title available?)
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Cited in

(11)

• International capital markets and redundant securities
• A few logs suffice to build (almost) all trees. II
• The Lucas orchard
• scientific article; zbMATH DE number 5778173 (Why is no real title available?)
• Asset pricing in a Lucas fruit-tree economy with the best and worst in mind
• On the strength of some trees
• Rational asset pricing bubbles and portfolio constraints
• Musings on the Cass trick
• Junior is rich: bequests as consumption
• Complete and incomplete financial markets in multi-good economies
• Multiplicity in general financial equilibrium with portfolio constraints

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