SFB 303 Discussion Paper No. A-449

Author: Hens, Thorsten, and András Löffler
Title: A Note on Gross Substitution in Financial Markets
Abstract: We develop a new condition that guarantees gross substitution of excess demand functions in a financial markets general equilibrium model. From this condition we derive that in equilibrium gross substitution holds for market excess demand if agents have constant absolute risk aversion or if risk sharing is complete. Furthermore, it follows from our condition that gross substitution holds for individual excess demand functions if the product of the agent's excess demand and her coefficient of absolute risk aversion is smaller than one. This result allows us to demonstrate that under some mild restrictions on the agents' risk aversion gross substitution holds for sufficiently large endowments.
Keywords: gross substition, risk aversion, financial markets
JEL-Classification-Number: D50, D81, G10
Creation-Date: June 1994
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