scholarly journals Equilibrium asset pricing with transaction costs

2021 ◽  
Author(s):  
Martin Herdegen ◽  
Johannes Muhle-Karbe ◽  
Dylan Possamaï
Keyword(s):  
Asset Pricing ◽  
Transaction Costs ◽  
Unique Solution ◽  
Risk Sharing ◽  
Positive Relationship ◽  
Trading Strategies ◽  
Equilibrium Asset Pricing ◽  
Liquidity Premia ◽  
Linear State ◽  
Fully Coupled

AbstractWe study risk-sharing economies where heterogeneous agents trade subject to quadratic transaction costs. The corresponding equilibrium asset prices and trading strategies are characterised by a system of nonlinear, fully coupled forward–backward stochastic differential equations. We show that a unique solution exists provided that the agents’ preferences are sufficiently similar. In a benchmark specification with linear state dynamics, the empirically observed illiquidity discounts and liquidity premia correspond to a positive relationship between transaction costs and volatility.

scholarly journals Equilibrium Asset Pricing with Transaction Costs

2019 ◽  
Author(s):  
Martin Herdegen ◽  
Johannes Muhle-Karbe ◽  
Dylan Possamaï
Keyword(s):  
Asset Pricing ◽  
Transaction Costs ◽  
Equilibrium Asset Pricing

scholarly journals IMPLICIT TRANSACTION COSTS AND THE FUNDAMENTAL THEOREMS OF ASSET PRICING

2017 ◽  
Vol 20 (04) ◽  
pp. 1750024 ◽  
Author(s):  
ERINDI ALLAJ
Keyword(s):  
Asset Pricing ◽  
Transaction Costs ◽  
Price Impact ◽  
Quadratic Variation ◽  
Trading Strategies ◽  
Arbitrage Pricing Theory ◽  
Bid Ask Spread ◽  
Bid Price ◽  
Equivalent Probability Measure ◽  
Implicit Transaction Costs

This paper studies arbitrage pricing theory in financial markets with implicit transaction costs. We extend the existing theory to include the more realistic possibility that the price at which the investors trade is dependent on the traded volume. The investors in the market always buy at the ask and sell at the bid price. Implicit transaction costs are composed of two terms, one is able to capture the bid-ask spread, and the second the price impact. Moreover, a new definition of a self-financing portfolio is obtained. The self-financing condition suggests that continuous trading is possible, but is restricted to predictable trading strategies having cádlág (right-continuous with left limits) and cáglád (left-continuous with right limits) paths of bounded quadratic variation and of finitely many jumps. That is, cádlág and cáglád predictable trading strategies of infinite variation, with finitely many jumps and of finite quadratic variation are allowed in our setting. Restricting ourselves to cáglád predictable trading strategies, we show that the existence of an equivalent probability measure is equivalent to the absence of arbitrage opportunities, so that the first fundamental theorem of asset pricing (FFTAP) holds. It is also shown that the use of continuous and bounded variation trading strategies can improve the efficiency of hedging in a market with implicit transaction costs. To better understand how to apply the theory proposed we provide an example of an implicit transaction cost economy that is linear and nonlinear in the order size.

Real-Time Profitability of Published Anomalies: An Out-of-Sample Test

2013 ◽  
Vol 03 (03n04) ◽  
pp. 1350016 ◽  
Author(s):  
Jing-Zhi Huang ◽  
Zhijian Huang
Keyword(s):  
Asset Pricing ◽  
Transaction Costs ◽  
Real Time ◽  
Empirical Evidence ◽  
Equity Market ◽  
Data Snooping ◽  
Asset Pricing Anomalies ◽  
Pricing Anomalies ◽  
Out Of Sample ◽  
Sample Test

Empirical evidence on the out-of-sample performance of asset-pricing anomalies is mixed so far and arguably is often subject to data-snooping bias. This paper proposes a method that can significantly reduce this bias. Specifically, we consider a long-only strategy that involves only published anomalies and non-forward-looking filters and that each year recursively picks the best past-performer among such anomalies over a given training period. We find that this strategy can outperform the equity market even after transaction costs. Overall, our results suggest that published anomalies persist even after controlling for data-snooping bias.

scholarly journals The Fundamental Theorem of Asset Pricing Under Transaction Costs

2011 ◽  
Author(s):  
Paolo Guasoni ◽  
Emmanuel Lepinette-Denis ◽  
Miklos Rasonyi
Keyword(s):  
Asset Pricing ◽  
Transaction Costs ◽  
Fundamental Theorem

scholarly journals Asset Pricing with General Transaction Costs: Theory and Numerics

2019 ◽  
Author(s):  
Lukas Gonon ◽  
Johannes Muhle-Karbe ◽  
Xiaofei Shi
Keyword(s):  
Asset Pricing ◽  
Transaction Costs

scholarly journals CRITICAL TRANSACTION COSTS AND 1-STEP ASYMPTOTIC ARBITRAGE IN FRACTIONAL BINARY MARKETS

2015 ◽  
Vol 18 (05) ◽  
pp. 1550029 ◽  
Author(s):  
FERNANDO CORDERO ◽  
LAVINIA PEREZ-OSTAFE
Keyword(s):  
Transaction Costs ◽  
Trading Strategies ◽  
Apparent Contradiction ◽  
New Family ◽  
Black Scholes Model ◽  
Asymptotic Arbitrage ◽  
Arbitrage Opportunities ◽  
Large Financial Market ◽  
Approximating Sequence ◽  
Black Scholes

We study the arbitrage opportunities in the presence of transaction costs in a sequence of binary markets approximating the fractional Black–Scholes model. This approximating sequence was constructed by Sottinen and named fractional binary markets. Since, in the frictionless case, these markets admit arbitrage, we aim to determine the size of the transaction costs needed to eliminate the arbitrage from these models. To gain more insight, we first consider only 1-step trading strategies and we prove that arbitrage opportunities appear when the transaction costs are of order [Formula: see text]. Next, we characterize the asymptotic behavior of the smallest transaction costs [Formula: see text], called "critical" transaction costs, starting from which the arbitrage disappears. Since the fractional Black–Scholes model is arbitrage-free under arbitrarily small transaction costs, one could expect that [Formula: see text] converges to zero. However, the true behavior of [Formula: see text] is opposed to this intuition. More precisely, we show, with the help of a new family of trading strategies, that [Formula: see text] converges to one. We explain this apparent contradiction and conclude that it is appropriate to see the fractional binary markets as a large financial market and to study its asymptotic arbitrage opportunities. Finally, we construct a 1-step asymptotic arbitrage in this large market when the transaction costs are of order o(1/NH), whereas for constant transaction costs, we prove that no such opportunity exists.

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