Equilibrium under TWAP trading with quadratic transaction costs

Eunjung Noh

Papers from arXiv.org

Abstract: We study how transaction cost affects to the equilibrium return and optimal stock holdings in equilibrium. To this end, we develop a continuous-time risk-sharing model where heterogenous agents trade toward terminal target holdings subject to a quadratic transaction cost. The equilibrium stock holdings and trading rate under transaction cost are characterized by a unique solution to a forward-backward stochastic differential equation (FBSDE). The equilibrium return is also characterized as the unique solution of a system of coupled but linear FBSDEs.

Date: 2020-08, Revised 2020-08
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2008.00908

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