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Equilibrium in Financial Markets with Market Frictions

Author

Listed:
  • Guangsug Hahn

    (POSTECH)

  • Dong Chul Won

    (Ajou University)

Abstract

Redundant assets have complicated implications to equilibrium, when available asset markets are subject to market frictions. We show the existence of equilibrium in two-period asset markets where portfolio choices are subject to portfolio constraints. The main consequences of the paper are differentiated from the literature in two respects. First, asset markets are allowed to have a large multiplicity of alternative portfolios in equilibrium. A portfolio decomposition technique is developed to resolve the large multiplicity problem. Second, we provide a survival condition with asset markets for the existence of equilibrium. Remarkably, this cannot be dispensed within the constrained asset markets, even when the endowment of goods is in the interior of the consumption set for each agent.

Suggested Citation

  • Guangsug Hahn & Dong Chul Won, 2007. "Equilibrium in Financial Markets with Market Frictions," Korean Economic Review, Korean Economic Association, vol. 23, pages 267-302.
    • Handle: RePEc:kea:keappr:ker-200712-23-2-03
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    File URL: http://keapaper.kea.ne.kr/RePEc/kea/keappr/KER-200712-23-2-03.pdf
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    References listed on IDEAS

    as
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    2. Cass, David & Siconolfi, Paolo & Villanacci, Antonio, 2001. "Generic regularity of competitive equilibria with restricted participation," Journal of Mathematical Economics, Elsevier, vol. 36(1), pages 61-76, September.
    3. Pham, Huyen & Touzi, Nizar, 1999. "The fundamental theorem of asset pricing with cone constraints," Journal of Mathematical Economics, Elsevier, vol. 31(2), pages 265-279, March.
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    5. Balasko, Yves & Cass, David, 1989. "The Structure of Financial Equilibrium with Exogenous Yields: The Case of Incomplete Markets," Econometrica, Econometric Society, vol. 57(1), pages 135-162, January.
    6. Lawrence M. Benveniste & Juan Ketterer, 1992. "Arbitrage Opportunities in Financial Markets are not Inconsistent with Competitive Equilibrium," Palgrave Macmillan Books, in: Mukul Majumdar (ed.), Equilibrium and Dynamics, chapter 4, pages 45-54, Palgrave Macmillan.
    7. Luttmer, Erzo G J, 1996. "Asset Pricing in Economies with Frictions," Econometrica, Econometric Society, vol. 64(6), pages 1439-1467, November.
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    Cited by:

    1. Sebastián Cea-Echenique & Juan Pablo Torres-Martínez, 2018. "General equilibrium with endogenous trading constraints," PLOS ONE, Public Library of Science, vol. 13(9), pages 1-10, September.

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    More about this item

    Keywords

    constrained arbitrage; equilibrium; portfolio constraints; redundant assets; incomplete markets;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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