General Equilibrium Foundations of Finance

1. Front Matter

   Pages i-xxvii

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2. The General Equilibrium Model with Incomplete Markets

   1. Front Matter

      Pages 1-1

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   2. The Model and Some Fundamentals

      • Thorsten Hens, Beate Pilgrim

      Pages 3-37

   3. Existence of Equilibria

      • Thorsten Hens, Beate Pilgrim

      Pages 39-59

   4. Structure of GEI-Excess Demand

      • Thorsten Hens, Beate Pilgrim

      Pages 61-69

   5. The Index-Theorem

      • Thorsten Hens, Beate Pilgrim

      Pages 71-78

   6. Uniqueness of Competitive Equilibria in the Arrow-Debreu Model

      • Thorsten Hens, Beate Pilgrim

      Pages 79-100

   7. Uniqueness of Competitive Equilibria in the Finance GEI-Model

      • Thorsten Hens, Beate Pilgrim

      Pages 101-211

3. The Capital Asset Pricing Model

   1. Front Matter

      Pages 213-213

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   2. The Model and Some Fundamentals

      • Thorsten Hens, Beate Pilgrim

      Pages 215-233

   3. Existence of Equilibria

      • Thorsten Hens, Beate Pilgrim

      Pages 235-243

   4. Market Demand Functions in the CAPM

      • Thorsten Hens, Beate Pilgrim

      Pages 245-257

   5. Uniqueness of Equilibria in the CAPM

      • Thorsten Hens, Beate Pilgrim

      Pages 259-270

4. Back Matter

   Pages 271-299

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The purpose of this book is to give a sound economic foundation of finance. Finance is a coherent branch of applied economics that is designed to understand financial markets in order to give advice for practical financial decisions. This book argues that for a sound economic foundation of finance the famous general equilibrium model which in its modern form emphasizes the incompleteness of financial markets is well suited. The aim of the book is to demonstrate that financial markets can be meaningfully embedded into a more general system of markets including, for example, commodity markets. The interaction of these markets can be described via the well known notion of a competitive equilibrium. We argue that for a sound foundation this competitive equilibrium should be unique. In a first step we demonstrate that this essential goal cannot of be achieved based only on the rationality principle, i. e. on the assumption utility maximization of some utility function subject to the budget constraint. In particular we show that this important lack of structure is disturbing as well for the case of mean-variance utility functions which are the basis of the Capital Asset Pricing Model, one of the cornerstones of finance. The final goal of our book is to give reasonable restrictions on the agents' utility functions which lead to a well determined financial markets model.

• Finance
• agents
• asset pricing
• economics
• equilibrium
• financial markets
• general equilibrium
• incomplete markets
• mathematical economics

• University of Zurich, Switzerland

  Thorsten Hens

• Norwegian Business School, Norway

  Thorsten Hens

• Reuters AG, Frankfurt, Germany

  Beate Pilgrim

Thorsten Hens, Ph.D. University of Bonn, is professor for financial economics at the institute for empirical research in economics at the University of Zurich. He has held positions in Bielefeld, Paris and Stanford and is currently also an adjunct professor at the Finance Department of the Norwegian Business School, NHH, in Bergen. Beate Pilgrim, Ph.D. University of Bielefeld, is currently working for Reuters AG, Frankfurt.

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