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- Title
Equilibrium returns with transaction costs.
- Authors
Bouchard, Bruno; Fukasawa, Masaaki; Herdegen, Martin; Muhle-Karbe, Johannes
- Abstract
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
ECONOMIC equilibrium; TRANSACTION costs; CAPITAL assets pricing model; STOCHASTIC differential equations; CONCRETE setting
- Publication
Finance & Stochastics, 2018, Vol 22, Issue 3, p569
- ISSN
0949-2984
- Publication type
Article
- DOI
10.1007/s00780-018-0366-6