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Dynamic Equilibrium with Liquidity Constraints

Jérôme Detemple1,2; Angel Serrat

1 Boston University · 2 Center for Interuniversity Research and Analysis on Organizations

Review of Financial Studies 2003

This article studies an intertemporal economy with liquidity constrained and unconstrained individuals. We use a stopping time approach to solve the finite horizonconstrained consumption portfolio problem with constant relative risk aversion and to examine the structure of equilibrium. The impact of the constraint on the optimal consumption and the financing portfolio is assessed. The equilibrium state price density is related to the exercise boundary of an American-style contingent claim with nonlinear payoff. This stopping time characterization enables us to prove the existence of an equilibrium and can be implemented numerically. Properties of equilibrium bond and stock returns are examined.

DOI
10.1093/rfs/hhg003
Volume
16 (2)
Pages
597-629
Language
en
Export
BibTeX
Sources
crossref openalex