Computing Equilibria in Stochastic Finance Economies

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