Equilibrium Liquidity Premia

Bruno Bouchard (1) , Masaaki Fukasawa (2) , Martin Herdegen (3) , Johannes Muhle-Karbe (4)

1 CEREMADE - CEntre de REcherches en MAthématiques de la DEcision
2 Osaka University [Osaka]
3 University of Warwick [Coventry]
4 University of Michigan [Ann Arbor]

We study equilibrium returns in a continuous-time model where heterogeneous mean-variance investors trade subject to quadratic transaction costs. The unique equilibrium is characterized by a system of coupled but linear forward-backward stochastic differential equations. Explicit solutions obtain in a number of concrete settings. The corresponding liquidity premia compared to the frictionless case are mean reverting; they are positive if the more risk-averse agents are net sellers or if the asset supply expands over time.

Mots clés: equilibrium; transaction costs; liquidity premium

Domaines: Probabilités [math.PR]

Bruno Bouchard, Masaaki Fukasawa, Martin Herdegen, Johannes Muhle-Karbe. Equilibrium Liquidity Premia. 2017. ⟨hal-01569408v2⟩