We describe a homotopy algorithm for the computation of equilibria in Stochastic Finance Economies. The algorithm solves a nonlinear system of equations consisting of the first-order conditions of the agents' utility maximization problems and market-clearing conditions. Moreover, we discuss the use of a straightforward homotopy approach for local comparative statics. Using our methods we evaluate price, volatility, and welfare effects of options in incomplete asset markets.
- Homotopy algorithm
- Incomplete markets
- Index theorem
- Stochastic finance economy
ASJC Scopus subject areas
- Economics, Econometrics and Finance (miscellaneous)
- Computer Science Applications