A Finite Agent Equilibrium in an Incomplete Market and its Strong Convergence to the Mean-Field Limit

Abstract

We investigate the problem of equilibrium price formation in an incomplete securities market. Each financial firm (agent) tries to minimize its cost via continuous-time trading with a securities exchange while facing the systemic and idiosyncratic noises as well as the stochastic order-flows from its over-the-counter clients. We have shown, in the accompanying paper (Fujii-Takahashi (2020)), that the solution to a certain forward backward stochastic differential equation of conditional McKean-Vlasov type gives a good approximate of the equilibrium price which clears the market in the large population limit. In this work, we prove the existence of a unique market clearing equilibrium among the heterogeneous agents of finite population size. We show the strong convergence to the corresponding mean-field limit under suitable conditions. In particular, we provide the stability relation between the market clearing price for the heterogeneous agents and that for the homogeneous mean-field limit.