Taxation And Transaction Costs In A General Equilibrium Asset Economy

Frank Milne and Xing Jin
Additional contact information
Xing Jin: University of Warwick

No 1111, Working Paper from Economics Department, Queen's University

Abstract: Most financial asset pricing models assume frictionless, competitive markets that imply the absence of arbitrage opportunities. Given the absence of arbitrage opportunities and complete asset markets, there exists a unique martingale measure that implies martingale pricing formulae and replicating asset portfolios. In incomplete markets, or markets with transaction costs, these results must be modified to admit non-unique measures and the possibility of imperfectly replicating portfolios. Similar difficulties arise in markets with taxation. Some theoretical research has argued that some taxation functions will imply arbitrage opportunities and the non-existence of a competitive asset economy. In this paper we construct a multi-period, discrete time/state general equilibrium model of asset markets with transaction costs and taxes. The transaction cost technology and the tax system are quite general, so that we can include most discrete time/state models with transaction costs and taxation. We show that a competitive equilibrium exists. Our results require careful modeling of the government budget constraints to rule out tax arbitrage possibilities.

Keywords: General Equilibrium; Transaction Costs; Taxation; Asset Economy (search for similar items in EconPapers)
JEL-codes: D52 G12 G38 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2006-10
New Economics Papers: this item is included in nep-cfn and nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econ.queensu.ca/sites/econ.queensu.ca/files/wpaper/qed_wp_1111.pdf First version 2006 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1111

Access Statistics for this paper

More papers in Working Paper from Economics Department, Queen's University Contact information at EDIRC.
Bibliographic data for series maintained by Mark Babcock ().