2019/05/14 by Muhle-Karbe, Johannes, Nutz, Marcel, Tan, Xiaowei
#FOS: Economics and business #General Finance (q-fin.GN) #Mathematical Finance (q-fin.MF) #Pricing of Securities (q-fin.PR)
paper · doi:10.48550/arxiv.1905.05730
This paper studies the equilibrium price of an asset that is traded in continuous time between N agents who have heterogeneous beliefs about the state process underlying the asset's payoff. We propose a tractable model where agents maximize expected returns under quadratic costs on inventories and trading rates. The unique equilibrium price is characterized by a weakly coupled system of linear parabolic equations which shows that holding and liquidity costs play dual roles. We derive the leading-order asymptotics for small transaction and holding costs which give further insight into the equilibrium and the consequences of illiquidity.