test Browse by Author Names Browse by Titles of Works Browse by Subjects of Works Browse by Issue Dates of Works
       

Advanced Search
Home   
 
Browse   
Communities
& Collections
  
Issue Date   
Author   
Title   
Subject   
 
Sign on to:   
Receive email
updates
  
My Account
authorized users
  
Edit Profile   
 
Help   
About T-Space   

T-Space at The University of Toronto Libraries >
Theoretical Economics >
Volume 2, Number 2 (June 2007) >

Please use this identifier to cite or link to this item: http://hdl.handle.net/1807/9746

Title: Two-fund separation in dynamic general equilibrium
Authors: Karl Schmedders; Kellogg School of Management
Keywords: Portfolio separation, dynamically complete markets, consol, one-period bond, interest rate fluctuation, reinvestment risk
D53, G11, G12
Issue Date: 3-Jun-2007
Publisher: Theoretical Economics
Citation: Theoretical Economics; Vol 2, No 2 (2007)
Abstract: [This item is a preserved copy. To view the original, visit http://econtheory.org/] This paper examines the two-fund separation paradigm in the context of an infinite-horizon general equilibrium model with dynamically complete markets and heterogeneous consumers with time- and state-separable utility functions. With the exception of the dynamic structure, we maintain the assumptions of the classical static models that exhibit two-fund separation with a riskless security. Agents have equi-cautious HARA utility functions. In addition to a security with state-independent payoffs, agents can trade a collection of assets with dividends following a time-homogeneous Markov process. We make no further assumptions about the distribution of asset dividends, returns, or prices. If the riskless security in the economy is a consol then agents' portfolios exhibit two-fund separation. However, if agents can trade only a one-period bond, this result no longer holds. The underlying intuition is that general equilibrium restrictions lead to interest rate fluctuations that destroy the optimality of two-fund separation in economies with a one-period bond and result in different equilibrium portfolios.
URI: http://hdl.handle.net/1807/9746
Other Identifiers: http://econtheory.org/ojs/index.php/te/article/view/20070135
Rights: Authors who publish in <i>Theoretical Economics</i> will release their articles under the <a href="http://creativecommons.org/licenses/by-nc/2.5/">Creative Commons Attribution-NonCommercial license</a>. This license allows anyone to copy and distribute the article for non-commercial purposes provided that appropriate attribution is given.
Appears in Collections:Volume 2, Number 2 (June 2007)

Files in This Item:

File Description SizeFormat
1208.pdf323.6 kBAdobe PDF
View/Open

Items in T-Space are protected by copyright, with all rights reserved, unless otherwise indicated.

uoft