Trading Volume in General Equilibrium with Complete Markets

By Eric Aldrich

http://d.repec.org/n?u=RePEc:red:sed012:36&r=dge

This paper investigates asset trade in a general-equilibrium complete-markets endowment economy with heterogeneous agents. It shows that standard no-trade results cease to hold when agents have heterogeneous beliefs and that substantial trade volume is generated, even in the presence of a spanning set of assets. Further, trade volume and price movements have a positive relationship in the model, as is well documented in the empirical literature. This paper also develops a computational algorithm for solving finite-period heterogeneous-beliefs economies and demonstrates how the problem is well suited for large-scale parallel computing methods, such as GPU computing.

This paper shows two important things: first, it is possible to generate economies where agents trade with each other in assets, and do this a lot. This has been a big issue in the previous literature. Second, it makes methodological advances in computing equilibria for heterogeneous agent models with finite horizons. That is quite a bog deal as the literature is more and more moving into economies that feature heterogeneity within life-cycles.

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