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Bouchard, Bruno, Fukasawa, Masaaki, Herdegen, Martin and Muhle-Karbe, Johannes (2018) Equilibrium returns with transaction costs. Finance and Stochastics, 22 (3). pp. 569-601. doi:10.1007/s00780-018-0366-6
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WRAP-equilibrium-returns-transaction-costs-Herdegen-2018.pdf - Accepted Version - Requires a PDF viewer. Download (755Kb) | Preview |
Official URL: https://doi.org/10.1007/s00780-018-0366-6
Abstract
We study how trading costs are reflected in equilibrium returns. To this end, we develop a tractable continuous-time risk-sharing model, where heterogeneous mean-variance investors trade subject to a quadratic transaction cost. The corresponding equilibrium is characterized as the unique solution of a system of coupled but linear forward-backward stochastic differential equations. Explicit solutions are obtained in a number of concrete settings. The sluggishness of the frictional portfolios makes the corresponding equilibrium returns mean-reverting. Compared to the frictionless case, expected returns are higher if the more risk-averse agents are net sellers or if the asset supply expands over time.
| Item Type: | Journal Article | |||||||||||||||||||||
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| Subjects: | H Social Sciences > HB Economic Theory | |||||||||||||||||||||
| Divisions: | Faculty of Science > Statistics | |||||||||||||||||||||
| Library of Congress Subject Headings (LCSH): | Equilibrium (Economics) -- Mathematical models , Transaction costs -- Mathematical models | |||||||||||||||||||||
| Journal or Publication Title: | Finance and Stochastics | |||||||||||||||||||||
| Publisher: | Springer | |||||||||||||||||||||
| ISSN: | 0949-2984 | |||||||||||||||||||||
| Official Date: | July 2018 | |||||||||||||||||||||
| Dates: |
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| Date of first compliant deposit: | 1 May 2018 | |||||||||||||||||||||
| Volume: | 22 | |||||||||||||||||||||
| Number: | 3 | |||||||||||||||||||||
| Page Range: | pp. 569-601 | |||||||||||||||||||||
| DOI: | 10.1007/s00780-018-0366-6 | |||||||||||||||||||||
| Status: | Peer Reviewed | |||||||||||||||||||||
| Publication Status: | Published | |||||||||||||||||||||
| Access rights to Published version: | Restricted or Subscription Access | |||||||||||||||||||||
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