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CCF Seminar
Martin Herdegen
Title: Equilibrium models with small transaction costs

Abstract: After the financial crisis, it has been proposed in many countries to introduce a financial transaction tax on stocks and derivatives. But how would such a tax affect financial markets? Would it have the beneficial consequences hoped for by its supporters or rather the detrimental consequences feared by its opponents?

To answer questions of this kind, one needs to consider general equilibrium models, where prices are determined endogenously. Indeed, taxes change agents' individual decision making, which in turn affects the market prices determined by their interactions. The new market environment then again alters the agents' behaviour, leading to a notoriously intractable fixed point problem.

In this talk, we present an asymptotic approach to this problem. We show that for small proportional transaction costs, prices of stocks and bonds need not change at the leading order. As a consequence, the recent partial equilibrium results on small frictions including Soner/Touzi 2014 or Kallsen/Muhle-Karbe 2015 can be extended to a general equilibrium setup.

The talk is based on joint work in progress with Johannes Muhle-Karbe (University of Michigan).

Date: Monday, March 14, 2016
Time: 4:30 pm
Location: Wean Hall 8220
Submitted by:  Kasper Larsen