Asset prices in general equilibrium with recursive utility and illiquidity induced by transactions costs
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 trans- action 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 two 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 trad- ing 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.
Year of publication: |
2015
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Authors: | Buss, Adrian ; Uppal, Raman ; Vilkov, Grigory |
Publisher: |
Frankfurt a. M. : Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe |
Subject: | Liquidity premium | incomplete markets | portfolio choice | heterogeneous agents |
Saved in:
freely available
Series: | SAFE Working Paper ; 41 |
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Type of publication: | Book / Working Paper |
Type of publication (narrower categories): | Working Paper |
Language: | English |
Other identifiers: | 10.2139/ssrn.2397083 [DOI] 1676208755 [GVK] hdl:10419/203274 [Handle] RePEc:zbw:safewp:41 [RePEc] |
Classification: | G11 - Portfolio Choice ; G12 - Asset Pricing |
Source: |
Persistent link: https://www.econbiz.de/10012064264