Asset prices in general equilibrium with recursive utility and illiquidity induced by transactions costs : [Version 15 February 2014]

  • 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.

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Metadaten
Author:Adrian Buss, Raman Uppal, Grigory Vilkov
URN:urn:nbn:de:hebis:30:3-331519
URL:http://ssrn.com/abstract=2397083
DOI:https://doi.org/10.2139/ssrn.2397083
Parent Title (German):SAFE working paper series ; No. 41
Series (Serial Number):SAFE working paper series (41)
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2014
Year of first Publication:2014
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2014/03/04
Tag:heterogeneous agents; incomplete markets; liquidity premium; portfolio choice
Issue:Version 15 February 2014
Page Number:60
First Page:1
Last Page:56
HeBIS-PPN:348921470
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universit├Ątspublikationen
Licence (German):License LogoDeutsches Urheberrecht