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Computing equilibria in finance economies with incomplete markets and transaction costs

  • P. Herings


  • Karl Schmedders


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. Copyright Springer-Verlag Berlin/Heidelberg 2006

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 27 (2006)
Issue (Month): 3 (04)
Pages: 493-512

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Handle: RePEc:spr:joecth:v:27:y:2006:i:3:p:493-512
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  1. Herings P. Jean-Jacques & Peeters R., 1999. "A Differentiable Homotopy to Compute Nash Equilibria of n-Person Games," Research Memorandum 038, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
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  9. Pradeep Dubey & John Geanakoplos & Martin Shubik, 1988. "Default and Efficiency in a General Equilibrium Model with Incomplete Markets," Cowles Foundation Discussion Papers 879R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1989.
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  18. Hens,Thorsten, 1991. "Structure of general equilibrium models with incomplete markets and a single consumption good," Discussion Paper Serie A 353, University of Bonn, Germany.
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