Radner equilibrium and systems of quadratic BSDEs with discontinuous generators

Abstract

Motivated by an equilibrium problem, we establish the existence of a solution for a family of Markovian backward stochastic differential equations with quadratic nonlinearity and discontinuity in $Z$. Using unique continuation and backward uniqueness, we show that the set of discontinuity has measure zero. In a continuous-time stochastic model of an endowment economy, we prove the existence of an incomplete Radner equilibrium with nondegenerate endogenous volatility.

49 pages, 2 figures