Arbeitspapier
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.
- Language
-
Englisch
- Bibliographic citation
-
Series: SAFE Working Paper ; No. 41
- Classification
-
Wirtschaft
Portfolio Choice; Investment Decisions
Asset Pricing; Trading Volume; Bond Interest Rates
- Subject
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Liquidity premium
incomplete markets
portfolio choice
heterogeneous agents
- Event
-
Geistige Schöpfung
- (who)
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Buss, Adrian
Uppal, Raman
Vilkov, Grigory
- Event
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Veröffentlichung
- (who)
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Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe
- (where)
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Frankfurt a. M.
- (when)
-
2015
- DOI
-
doi:10.2139/ssrn.2397083
- Handle
- Last update
-
10.03.2025, 11:45 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Buss, Adrian
- Uppal, Raman
- Vilkov, Grigory
- Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe
Time of origin
- 2015
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