A General Equilibrium Financial Asset Economy with Transaction Costs and Trading Constraints

Frank Milne and Edwin Neave

No 273558, Queen's Economics Department Working Papers from Queen's University - Department of Economics

Abstract: This paper presents a unified framework for examining the general equilibrium effects of transactions costs and trading constraints on security market trades and prices. The model uses a discrete time/state framework and Kuhn- Tucker theory to characterize the optimal decisions of consumers and financial intermediaries. Transaction costs and constraints give rise to regions of no trade and to bid-ask spreads: their existence frustrate the derivation of standard results in arbitrage-based pricing. Nevertheless, we are able to obtain as dual characterisations of our primal problems, one-sided arbitrage pricing results and a personalised martingale representation of asset pricing. These pricing results are identical to those derived by Jouini and Kallal (1995) using arbitrage arguments. The paper’s framework incorporates a number of specialised existing models and results, proves new results and discusses new directions for research. In particular, we include characterisations of intermediaries who hold optimal portfolios; brokers who do not hold portfolios, and consumer-specific

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 46
Date: 2003-09
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Working Paper: A General Equilibrium Financial Asset Economy With Transaction Costs And Trading Constraints (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:quedwp:273558

DOI: 10.22004/ag.econ.273558

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