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Mathematics and Financial Economics
Published in: Mathematics and Financial Economics 4/2018

27-02-2018

Existence of a Radner equilibrium in a model with transaction costs

Author: Kim Weston

Published in: Mathematics and Financial Economics | Issue 4/2018

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Abstract

We prove the existence of a Radner equilibrium in a model with proportional transaction costs on an infinite time horizon and analyze the effect of transaction costs on the endogenously determined interest rate. Two agents receive exogenous, unspanned income and choose between consumption and investing into an annuity. After establishing the existence of a discrete-time equilibrium, we show that the discrete-time equilibrium converges to a continuous-time equilibrium model. The continuous-time equilibrium provides an explicit formula for the equilibrium interest rate in terms of the transaction cost parameter. We analyze the impact of transaction costs on the equilibrium interest rate and welfare levels.
previous article A scaled version of the double-mean-reverting model for VIX derivatives
next article Sensitivity analysis for marked Hawkes processes: application to CLO pricing

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Metadata
Title
Existence of a Radner equilibrium in a model with transaction costs
Author
Kim Weston
Publication date
27-02-2018
Publisher
Springer Berlin Heidelberg
Published in
Mathematics and Financial Economics / Issue 4/2018
Print ISSN: 1862-9679
Electronic ISSN: 1862-9660
DOI
https://doi.org/10.1007/s11579-018-0214-7

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