Summary.
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.
Similar content being viewed by others
Author information
Authors and Affiliations
Corresponding author
Additional information
Received: 2 December 2002, Revised: 15 November 2004,
JEL Classification Numbers:
C61, C62, C63, C68, D52, D58, G11, G12.
Correspondence to: P. Jean-Jacques Herings
This research started when Jean-Jacques Herings enjoyed the generous hospitality of the Cowles Foundation for Research in Economics at Yale University. His research has been made possible by a fellowship of the Royal Netherlands Academy of Arts and Sciences and a grant of the Netherlands Organisation for Scientific Research. We thank audiences at Stanford University, UC San Diego, and Venice for discussions on the subject. We are very grateful to an anonymous referee for very helpful comments on an earlier draft.
Rights and permissions
About this article
Cite this article
Herings, P.JJ., Schmedders, K. Computing equilibria in finance economies with incomplete markets and transaction costs. Economic Theory 27, 493–512 (2006). https://doi.org/10.1007/s00199-004-0583-4
Issue Date:
DOI: https://doi.org/10.1007/s00199-004-0583-4