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A multi-agent targeted trading equilibrium with transaction costs

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  • Jin Hyuk Choi
  • Jetlir Duraj
  • Kim Weston

Abstract

We prove the existence of a continuous-time Radner equilibrium with multiple agents and transaction costs. The agents are incentivized to trade towards a targeted number of shares throughout the trading period and seek to maximize their expected wealth minus a penalty for deviating from their targets. Their wealth is further reduced by transaction costs that are proportional to the number of stock shares traded. The agents' targeted number of shares is publicly known, making the resulting equilibrium fully revealing. In equilibrium, each agent optimally chooses to trade for an initial time interval before stopping trade. Our equilibrium construction and analysis involves identifying the order in which the agents stop trade. The transaction cost level impacts the equilibrium stock price drift. We analyze the equilibrium outcomes and provide numerical examples.

Suggested Citation

  • Jin Hyuk Choi & Jetlir Duraj & Kim Weston, 2023. "A multi-agent targeted trading equilibrium with transaction costs," Papers 2306.08519, arXiv.org.
    • Handle: RePEc:arx:papers:2306.08519
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    References listed on IDEAS

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    1. Martin Herdegen & Johannes Muhle-Karbe, 2018. "Stability of Radner equilibria with respect to small frictions," Finance and Stochastics, Springer, vol. 22(2), pages 443-502, April.
    2. Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2004. "Asset Prices and Trading Volume under Fixed Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 1054-1090, October.
    3. Jean-Luc Vila & Dimitri Vayanos, 1999. "Equilibrium interest rate and liquidity premium with transaction costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 13(3), pages 509-539.
    4. Huang, Ming, 2003. "Liquidity shocks and equilibrium liquidity premia," Journal of Economic Theory, Elsevier, vol. 109(1), pages 104-129, March.
    5. Dimitri Vayanos, 1999. "Strategic Trading and Welfare in a Dynamic Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 219-254.
    6. Kim Weston, 2017. "Existence of a Radner equilibrium in a model with transaction costs," Papers 1702.01706, arXiv.org, revised Feb 2018.
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