Formulation and computation of general financial equilibrium

In this paper a model of competitive financial equilibrium is introduced, which yields the optimal composition of assets and liabilities in each sector’s portfolio, as well as the market clearing prices for each instrument. The variational inequality formulation of the equilibrium conditions is then utilized to establish existence and uniqueness properties of the solution pattern. Finally, an algorithm is proposed for the computation of the equilibrium pattern; the algorithm resolves the problem into simple network subproblems which can then be solved in closed form. The algorithm is then applied to an example.