Equilibrium Returns with Transaction Costs

21. December 2017
Research Seminars
Rudower Chaussee 25, Room 1.115, 5 p.m.
Martin Herdegen (University of Warwick)

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.

The talk is based on joint work with Bruno Bouchard, Masaaki Fukasawa and Johannes Muhle-Karbe.


d-fine: job opportunities

d-fine continuously offers job opportunities for students and university graduates, both internships and permanent positions. Please use the following Link if you are curious to learn more about working in the exciting field of quantitative finance consultancy.