Asset trading volume in a production economy

Abstract

Judd et al. (J Finance 63: 2203–2217, 2003) show that the stationary Lucas tree model cannot generate nontrivial asset trading: Heterogenous agents will optimally choose a fixed portfolio after initial rebalancing. This paper explores asset trading volume in production economies with heterogeneous agents and dynamically complete market structures. We establish a recursive version of the Negishi approach to prove the existence of a competitive equilibrium. Furthermore, we develop a general method to solve for equilibrium portfolios in production economies within a fairly general set of complete market structures. We thus establish the theoretical reasons why production economies in general generate a nontrivial volume of asset trading even if heterogeneity of the agents is kept to a minimum.