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Equilibrium returns with transaction costs

Bouchard, Bruno; Fukasawa, Masaaki; Herdegen, Martin; Muhle-Karbe, Johannes (2018), Equilibrium returns with transaction costs, Finance and Stochastics, p. 33. 10.1007/s00780-018-0366-6

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Type
Article accepté pour publication ou publié
Date
2018-05
Journal name
Finance and Stochastics
Publisher
Springer
Pages
33
Publication identifier
Metadata
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Author(s)
Bouchard, Bruno
CEntre de REcherches en MAthématiques de la DEcision [CEREMADE]
Fukasawa, Masaaki
Osaka University, Osaka 565-0871, Japan
Herdegen, Martin
Department of Statistics [Coventry]
Muhle-Karbe, Johannes
Mathematics Department
Abstract (EN)
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.
Subjects / Keywords
Equilibrium; Transaction costs; FBSDEs; liquidity premium
JEL
C68 - Computable General Equilibrium Models
D52 - Incomplete Markets
G11 - Portfolio Choice; Investment Decisions
G12 - Asset Pricing; Trading Volume; Bond Interest Rates