Equilibrium returns with transaction costs

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...

Full description

Saved in:
Bibliographic Details
Published inFinance and stochastics Vol. 22; no. 3; pp. 569 - 601
Main Authors Bouchard, Bruno, Fukasawa, Masaaki, Herdegen, Martin, Muhle-Karbe, Johannes
Format Journal Article
LanguageEnglish
Published Berlin/Heidelberg Springer Berlin Heidelberg 01.07.2018
Springer Nature B.V
Springer Verlag (Germany)
Subjects
Computational Finance
Differential equations
Economic models
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Equilibrium
Finance
Insurance
Management
Mathematics
Mathematics and Statistics
Portfolios
Probability
Probability Theory and Stochastic Processes
Quantitative Finance
Statistics for Business
Trading
Transaction costs
D52
91G10
C68
G11
FBSDEs
G12
Equilibrium
Transaction costs
91G80
transaction costs
equilibrium
liquidity premium
Online AccessGet full text

Cover

More Information
Summary: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.
Bibliography:ObjectType-Article-1
SourceType-Scholarly Journals-1
ObjectType-Feature-2
content type line 14
ISSN:0949-2984
1432-1122
DOI:10.1007/s00780-018-0366-6