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We consider the Arrow–Debreu exchange market model under the assumption that the agents’ demands satisfy the weak gross substitutes (WGS) property. We present a simple auction algorithm that obtains an approximate market equilibrium for WGS demands assuming the availability of a price update oracle. We exhibit specific implementations of such an oracle for WGS demands with bounded price elasticities and for Gale demand systems.
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Asset pricing with heterogeneous beliefs and illiquidity
Abstract This paper studies the equilibrium price of an asset that is traded in continuous time betweenNagents who have heterogeneous beliefs about the state process underlying the asset's payoff. We propose a tractable model where agents maximize expected returns under quadratic costs on inventories and trading rates. The unique equilibrium price is characterized by a weakly coupled system of linear parabolic equations which shows that holding and liquidity costs play dual roles. We derive the leading‐order asymptotics for small transaction and holding costs which give further insight into the equilibrium and the consequences of illiquidity.
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- Award ID(s):
- 1812661
- PAR ID:
- 10453420
- Publisher / Repository:
- Wiley-Blackwell
- Date Published:
- Journal Name:
- Mathematical Finance
- Volume:
- 30
- Issue:
- 4
- ISSN:
- 0960-1627
- Page Range / eLocation ID:
- p. 1392-1421
- Format(s):
- Medium: X
- Sponsoring Org:
- National Science Foundation
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