Computing Equilibria in Stochastic Finance Economies

We describe a homotopy algorithm for the computation of equilibriain Stochastic Finance Economies. The algorithm solves a nonlinearsystem of equations consisting of the first-order conditions of theagents' utility maximization problems and market-clearing conditions.Moreover, we discuss the use of a straightforward homotopy approach for localcomparative statics. Using our methods we evaluate price, volatility,and welfare effects of options in incomplete asset markets.

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