Paper: arXiv 2512.14680

Authors: Heeyoung Kwon, Kasper Larsen

Abstract

We extend the limited participation model in Basak and Cuoco (1998) to allow for traders with different time-preference coefficients but identical constant relative risk-aversion coefficients. Our main result gives parameter restrictions which ensure the existence of a Radner equilibrium. As an application, we give further parameter restrictions which ensure all traders survive in the long run.

Complexity vs Empirical Score

  • Math Complexity: 8.5/10
  • Empirical Rigor: 1.0/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper presents a rigorous theoretical extension of incomplete market equilibrium models using non-linear singular ODEs and continuous-time stochastic calculus to prove trader survival. However, as a purely theoretical paper, it completely lacks empirical backtesting, data analysis, or real-world financial datasets.

Research Flowchart

  flowchart TD
    A[Research Goal: Analyze long-run survival in limited participation models with heterogeneous time preferences] --> B[Inputs: Power utilities with identical CRRA & differing time-preference coefficients]
    B --> C[Methodology: Extend Basak & Cuoco 1998 continuous-time general equilibrium framework]
    C --> D[Computational Process: Derive parameter restrictions for Radner Equilibrium existence]
    D --> E[Computational Process: Analyze asymptotic behavior of state prices & wealth shares]
    E --> F[Outcomes: Defined conditions for Radner Equilibrium & long-run survival of all traders]

Cited References (19)

  1. Existence of an equilibrium with limited stock market participation and power utilities — → 2402.07185
  2. Existence of an equilibrium with limited participation (2022) — link
  3. Survival and Long-Run Dynamics with Heterogeneous Beliefs under Recursive Preferences (2020) — link
  4. Asset Prices with Heterogeneity in Preferences and Beliefs (2014) — link
  5. Rational asset pricing bubbles and portfolio constraints (2012) — link
  6. Dynamic Equilibrium with Heterogeneous Agents and Risk Constraints (2010) — link
  7. Natural Selection in Financial Markets: Does It Work? (2008) — link
  8. The Price Impact and Survival of Irrational Traders (2006) — link
and 11 more
  1. An Equilibrium Model with Restricted Stock Market Participation (1997) — link
  2. Wealth dynamics and asset prices with heterogeneous beliefs under smooth ambiguity (2025)
  3. Foundations of modern probability , 3rd Ed (2021)
  4. Continuous Martingales and Brownian Motion , 3rd ed. (2013)
  5. The Equity Premium Puzzle (2001)
  6. Dynamic asset pricing theory , 3rd Ed (2001)
  7. Brownian motion and stochastic calculus , 2nd Ed. (1998)
  8. One-dimensional diffusion processes and their boundaries (1996)
  9. The equity premium puzzle and the risk-free rate puzzle at long horizons (1996)
  10. Data availability statement: We do not analyze nor generate any datasets
  11. b) The boundary point y = 1 is inaccessible and natural

1 of 19 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.