Equilibrium Liquidity Premia

Bouchard, Bruno; Fukasawa, Masaaki; Herdegen, Martin; Muhle-Karbe, Johannes

Bouchard, Bruno; Fukasawa, Masaaki; Herdegen, Martin; Muhle-Karbe, Johannes (2017), Equilibrium Liquidity Premia. https://basepub.dauphine.fr/handle/123456789/17087

Type

Document de travail / Working paper

External document link

https://hal.archives-ouvertes.fr/hal-01569408

Date

2017

Series title

Cahier de recherche CEREMADE, Université Paris-Dauphine

Metadata

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Author(s)

Bouchard, Bruno
Fukasawa, Masaaki
Herdegen, Martin
Muhle-Karbe, Johannes

Abstract (EN)

We study equilibrium returns in a continuous-time model where heterogeneous mean-variance investors trade subject to quadratic transaction costs. The unique equilibrium is characterized by a system of coupled but linear forward-backward stochastic differential equations. Explicit solutions obtain in a number of concrete settings. The corresponding liquidity premia compared to the frictionless case are mean reverting; they are positive if the more risk-averse agents are net sellers or if the asset supply expands over time.

Subjects / Keywords

equilibrium; transaction costs; liquidity premium