Stationary equilibria in asset-pricing models with incomplete markets and collateral

Felix Kubler*, Karl Schmedders

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

74 Scopus citations


We consider an infinite-horizon exchange economy with incomplete markets and collateral constraints. As in the two-period model of Geanakoplos and Zame (2002), households can default on their liabilities at any time, and financial securities are only traded if the promises associated with these securities are backed by collateral. We examine an economy with a single perishable consumption good, where the only collateral available consists of productive assets. In this model, competitive equilibria always exist and we show that, under the assumption that all exogenous variables follow a Markov chain, there also exist stationary equilibria. These equilibria can be characterized by a mapping from the exogenous shock and the current distribution of financial wealth to prices and portfolio choices. We develop an algorithm to approximate this mapping numerically and discuss ways to implement the algorithm in practice. A computational example demonstrates the performance of the algorithm and shows some quantitative features of equilibria in a model with collateral and default.

Original languageEnglish (US)
Pages (from-to)1767-1793
Number of pages27
Issue number6
StatePublished - 2003


  • Collateral
  • Default
  • Incomplete markets
  • Markov equilibrium

ASJC Scopus subject areas

  • Economics and Econometrics


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