Stability of Radner equilibria with respect to small frictions

Martin Herdegen () and Johannes Muhle-Karbe ()
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Martin Herdegen: University of Warwick
Johannes Muhle-Karbe: Carnegie Mellon University

Finance and Stochastics, 2018, vol. 22, issue 2, No 8, 443-502

Abstract: Abstract We study risk-sharing equilibria with trading subject to small proportional transaction costs. We show that the frictionless equilibrium prices also form an “asymptotic equilibrium” in the small-cost limit. More precisely, there exist asymptotically optimal policies for all agents and a split of the trading cost according to their risk aversions for which the frictionless equilibrium prices still clear the market. Starting from a frictionless equilibrium, this allows studying the interplay of volatility, liquidity and trading volume.

Keywords: Trading costs; Radner equilibrium; Asymptotics; Stability; Transaction tax; 91B51; 91G10 (search for similar items in EconPapers)
JEL-codes: D52 G11 G12 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (10)

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DOI: 10.1007/s00780-018-0354-x

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