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Equilibrium asset pricing with transaction costs
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Herdegen, Martin, Muhle-Karbe, J. and Possamaï, D. (2021) Equilibrium asset pricing with transaction costs. Finance and Stochastics, 25 . pp. 231-275. doi:10.1007/s00780-021-00449-4 ISSN 0949-2984.
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Official URL: https://doi.org/10.1007/s00780-021-00449-4
Abstract
We study risk-sharing economies where heterogeneous agents trade subject to quadratic transaction costs. The corresponding equilibrium asset prices and trading strategies are characterised by a system of nonlinear, fully coupled forward–backward stochastic differential equations. We show that a unique solution exists provided that the agents’ preferences are sufficiently similar. In a benchmark specification with linear state dynamics, the empirically observed illiquidity discounts and liquidity premia correspond to a positive relationship between transaction costs and volatility.
Item Type: | Journal Article | ||||||||
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Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
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Divisions: | Faculty of Science, Engineering and Medicine > Science > Statistics | ||||||||
Library of Congress Subject Headings (LCSH): | Equilibrium (Economics) -- Mathematical models, Capital assets pricing model, Transaction costs -- Mathematical models | ||||||||
Journal or Publication Title: | Finance and Stochastics | ||||||||
Publisher: | Springer | ||||||||
ISSN: | 0949-2984 | ||||||||
Official Date: | April 2021 | ||||||||
Dates: |
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Volume: | 25 | ||||||||
Page Range: | pp. 231-275 | ||||||||
DOI: | 10.1007/s00780-021-00449-4 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Open Access (Creative Commons) | ||||||||
Date of first compliant deposit: | 30 November 2020 | ||||||||
Date of first compliant Open Access: | 10 March 2021 | ||||||||
RIOXX Funder/Project Grant: |
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