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Equilibrium returns with transaction costs

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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 ISSN 0949-2984.

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Official URL: https://doi.org/10.1007/s00780-018-0366-6

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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
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Science, Engineering and Medicine > 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:
DateEvent
July 2018Published
25 May 2018Available
29 March 2018Accepted
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
Date of first compliant deposit: 1 May 2018
Date of first compliant Open Access: 25 May 2019
RIOXX Funder/Project Grant:
Project/Grant IDRIOXX Funder NameFunder ID
UNSPECIFIEDUniversité de Recherche Paris Sciences et Lettreshttp://dx.doi.org/10.13039/501100009517
UNSPECIFIED[CNRS] Centre National de la Recherche Scientifiquehttp://dx.doi.org/10.13039/501100004794
7534Unité Mixte de Recherche (UMR)UNSPECIFIED
UNSPECIFIEDC.E.R.E.M.A.D.E.http://viaf.org/viaf/130011736
5245046[JSPS] Japan Society for the Promotion of Sciencehttp://dx.doi.org/10.13039/501100001691
150101[SNSF] Schweizerischer Nationalfonds zur Förderung der Wissenschaftlichen Forschunghttp://dx.doi.org/10.13039/501100001711
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