Stability of Radner Equilibria with Respect to Small Frictions

54 Pages Posted: 21 Feb 2017 Last revised: 21 Sep 2017

See all articles by Martin Herdegen

Martin Herdegen

University of Warwick - Department of Statistics

Johannes Muhle-Karbe

Carnegie Mellon University - Department of Mathematical Sciences

Date Written: September 20, 2017

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. 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

Herdegen, Martin and Muhle-Karbe, Johannes, Stability of Radner Equilibria with Respect to Small Frictions (September 20, 2017). Available at SSRN: https://ssrn.com/abstract=2921220 or http://dx.doi.org/10.2139/ssrn.2921220

Martin Herdegen

University of Warwick - Department of Statistics ( email )

Coventry CV4 7AL
United Kingdom

Johannes Muhle-Karbe (Contact Author)

Carnegie Mellon University - Department of Mathematical Sciences ( email )

Pittsburgh, PA 15213-3890
United States

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