Asset Prices in General Equilibrium with Recursive Utility and Illiquidity Induced by Transactions Costs
Project Start: | 02/2014 |
Status: | Completed |
Researchers: | Grigory Vilkov, Kailin Zeng |
Category: | Financial Markets, Systemic Risk Lab, Transparency Lab |
Funded by: | LOEWE |
Topic and Objectives
The project studies the effect of proportional transaction costs on consumption-portfolio decisions and asset prices in a dynamic general equilibrium economy with multiple investors who have stochastic labor income and heterogeneous Epstein-Zin-Weil utility functions and a financial market with a single-period bond and two risky stocks, one of which incurs the transaction cost. The transaction cost gives rise to endogenous variations in liquidity.
Key Findings
- 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.
- Even in the presence of stochastic labor income, transaction costs have only a small effect on the consumption decisions of investors, and hence, on equity risk premia and the liquidity premium.
- The effects of transaction costs on quantities such as the liquidity premium depend on whether the analysis is undertaken in general equilibrium or in partial equilibrium.
Related Working Papers
No. | Author/s | Title | Year | Program Area | Keywords |
---|---|---|---|---|---|
5 | Grigory Vilkov, Yan Xiao | Option-Implied Information and Predictability of Extreme Returns | 2013 | Financial Markets, Systemic Risk Lab, Transparency Lab | extreme value theory, tail measure, implied correlation, variance risk premium, option-implied distribution, predictability, portfolio optimization |
41 | Adrian Buss, Raman Uppal, Grigory Vilkov | Asset Prices in General Equilibrium with Recursive Utility and Illiquidity Induced by Transactions Costs | 2014 | Financial Markets, Systemic Risk Lab, Transparency Lab | liquidity premium, incomplete markets, portfolio choice, heterogeneous agents |
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