Taylor approximation of incomplete Radner equilibrium models

Choi, Jin Hyuk; Larsen, Kasper

doi:10.1007/s00780-015-0268-9

Cited by 40 publications

(26 citation statements)

References 13 publications

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“…This assumption crucially simplifies the analysis by abstracting from the wealth effects of transaction costs on portfolio choice. The same assumption is made in virtually all continuous-time incomplete equilibrium models, compare, e.g., [66,67,48,14,71,13,12,45,69]. It could be replaced by formally assuming that transaction costs are refunded immediately as in [17], compare Section 4.3.…”

Section: Introductionmentioning

confidence: 99%

Stability of Radner equilibria with respect to small frictions

Herdegen

Muhle‐Karbe

2018

Finance Stoch

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Section: Introductionmentioning

confidence: 99%

Stability of Radner equilibria with respect to small frictions

Herdegen

Muhle‐Karbe

2018

Finance Stoch

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“…Here, the constant volatility σ is given exogenously, whereas the expected returns process µ ∈ L 2 is to be determined endogenously by matching the agents' demand to the fixed supply s ∈ R of the risky asset; see [46,51,16,33,22,50,9] for related equilibrium models where the volatility is a free parameter. Models where the volatility is determined endogenously are discussed in Section 6.…”

Section: Risk-sharing Economymentioning

confidence: 99%

Asset Pricing with General Transaction Costs: Theory and Numerics

2019

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We study risk-sharing equilibria with general convex costs on the agents' trading rates. For an infinite-horizon model with linear state dynamics and exogenous volatilities, the equilibrium returns mean-revert around their frictionless counterparts -the deviation has Ornstein-Uhlenbeck dynamics for quadratic costs whereas it follows a doubly-reflected Brownian motion if costs are proportional. More general models with arbitrary state dynamics and endogenous volatilities lead to multidimensional systems of nonlinear, fully-coupled forward-backward SDEs. These fall outside the scope of known wellposedness results, but can be solved numerically using the simulation-based deep-learning approach of [28]. In a calibration to time series of returns, bidask spreads, and trading volume, transaction costs substantially affect equilibrium asset prices. In contrast, the effects of different cost specifications are rather similar, justifying the use of quadratic costs as a proxy for other less tractable specifications.Mathematics Subject Classification: (2010) 91G10, 91G80, 60H10.JEL Classification: C68, D52, G11, G12.

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“…A similar model with a single strategic agent and noise traders with a particular parametric demand is analyzed in [18,Section 4]. Conversely, [49,11,29,48] study models of the above form without noise traders (and with exponential rather than mean-variance preferences).…”

Section: Remark 22mentioning

confidence: 99%

Equilibrium returns with transaction costs

et al. 2018

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We study how trading costs are reflected in equilibrium returns. To this end, we develop a tractable continuous-time risk-sharing model, where heterogeneous mean-variance investors trade subject to a quadratic transaction cost. The corresponding equilibrium is characterized as the unique solution of a system of coupled but linear forward-backward stochastic differential equations. Explicit solutions are obtained in a number of concrete settings. The sluggishness of the frictional portfolios makes the corresponding equilibrium returns mean-reverting. Compared to the frictionless case, expected returns are higher if the more risk-averse agents are net sellers or if the asset supply expands over time.Mathematics Subject Classification (2010): 91G10, 91G80.JEL Classification: C68, D52, G11, G12. We are grateful to Michalis Anthropelos, Peter Bank, Paolo Guasoni, and Felix Kübler for stimulating discussions and detailed comments. Moreover, we thank an anonymous referee for his or her careful reading and pertinent remarks.

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Taylor approximation of incomplete Radner equilibrium models

Cited by 40 publications

References 13 publications

Stability of Radner equilibria with respect to small frictions

Stability of Radner equilibria with respect to small frictions

Asset Pricing with General Transaction Costs: Theory and Numerics

Equilibrium returns with transaction costs

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