SFB 303 Discussion Paper No. A - 403

Author: Laitenberger, Marta
Title: Existence of Financial Market Equilibria with Transaction Costs
Abstract: The purpose of this paper is to give a general existence proof of equilibria in a two period exchange economy with incomplete markets and transaction costs. It is shown that the Arrow-Debreu existence result from the traditional General Equilibrium theory applies directly to the standard Incomplete Markets framework, when tradings on financial markets incur real transaction costs. The latter can be interpreted as a real taxation of returns from financial transactions. Asset tradings being bounded by the limited resources of the economy, it is possible to "compactify" the set of individual portfolios, such that existence of financial market equilibria follows from the "lemma on abstract economies" going back to Arrow and Debreu. Besides, the modified no-arbitrage condition holding in the case of transaction costs is derived.
Creation-Date: February 1993
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