Abstract
Transaction costs on financial markets may have important consequences for volumes of trade, asset pricing, and welfare. This paper introduces an algorithm for the computation of equilibria in the general equilibrium model with incomplete asset markets and transaction costs. We show that economies with transaction costs can be analyzed with differentiable homotopy techniques and thus in the same framework as frictionless economies despite the existence of non-differentiabilities of agents' asset demand functions and the existence of locally non-unique equilibria. We introduce an equilibrium selection concept into the computation of economic equilibria that picks out a specific equilibrium in the presence of a continuum of equilibria.
Original language | English (US) |
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Pages (from-to) | 493-512 |
Number of pages | 20 |
Journal | Economic Theory |
Volume | 27 |
Issue number | 3 |
DOIs | |
State | Published - Apr 2006 |
Keywords
- Asset pricing
- Computational methods
- Incomplete markets
- Transaction costs
ASJC Scopus subject areas
- Economics and Econometrics