Stability of Radner Equilibria with Respect to Small Frictions
54 Pages Posted: 21 Feb 2017 Last revised: 21 Sep 2017
Date Written: September 20, 2017
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. To wit, 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 to study the interplay of volatility, liquidity, and trading volume.
Keywords: Trading costs, Radner equilibrium, asymptotics, stability, transaction tax
JEL Classification: D52, G11, G12
Suggested Citation: Suggested Citation