Work

Equilibrium Asset Pricing with Transaction Costs

Year: 2019

Type: article

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.

Source: Finance and Stochastics

DOI: 10.1007/s00780-021-00449-4

Authors: Martin Herdegen, Johannes Muhle-Karbe, Dylan Possamaï

Institutions: University of Warwick, Imperial College London, ETH Zurich

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $2,690

Funder: Eidgenössische Technische Hochschule Zürich