Equilibrium asset pricing with transaction costs

Martin Herdegen (), Johannes Muhle-Karbe () and Dylan Possamaï ()
Additional contact information
Martin Herdegen: University of Warwick
Johannes Muhle-Karbe: Imperial College London
Dylan Possamaï: ETH Zürich

Finance and Stochastics, 2021, vol. 25, issue 2, No 2, 275 pages

Abstract: 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.

Keywords: Asset pricing; Radner equilibrium; Transaction costs; Forward-backward SDEs; 91G10; 91G80; 60H10 (search for similar items in EconPapers)
JEL-codes: C68 D52 G11 G12 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s00780-021-00449-4

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