TY  - UNPD
A1  - Buss, Adrian
A1  - Uppal, Raman
A1  - Vilkov, Grigory
T1  - Asset prices in general equilibrium with recursive utility and illiquidity induced by transactions costs : [Version 15 February 2014]
T2  - SAFE working paper series ; No. 41
N2  - In this paper, we study the effect of proportional transaction costs on consumption-portfolio decisions and asset prices in a dynamic general equilibrium economy with a financial market that has a single-period bond and two risky stocks, one of which incurs the transaction cost. Our model has multiple investors with stochastic labor income, heterogeneous beliefs, and heterogeneous Epstein-Zin-Weil utility functions. The transaction cost gives rise to endogenous variations in liquidity. We show how equilibrium in this incomplete-markets economy can be characterized and solved for in a recursive fashion. We have three main findings. One, costs for trading a stock lead to a substantial reduction in the trading volume of that stock, but have only a small effect on the trading volume of the other stock and the bond. Two, even in the presence of stochastic labor income and heterogeneous beliefs, transaction costs have only a small effect on the consumption decisions of investors, and hence, on equity risk premia and the liquidity premium. Three, the effects of transaction costs on quantities such as the liquidity premium are overestimated in partial equilibrium relative to general equilibrium.
T3  - SAFE working paper - 41 
KW  - liquidity premium
KW  - incomplete markets
KW  - portfolio choice
KW  - heterogeneous agents
Y1  - 2014
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33151
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-331519
UR  - http://ssrn.com/abstract=2397083
IS  - Version 15 February 2014
SP  - 1
EP  - 56
PB  - SAFE
CY  - Frankfurt am Main
ER  -