Seminar: "Continuous-time Equilibrium Returns in Markets with Price Impact and Transaction Costs"

AUEB STATISTICS SEMINAR SERIES 2024-2025

Presenter: Michail Anthropelos, Department of Banking and Financial Management, University of Piraeus

Continuous-time Equilibrium Returns in Markets with Price Impact and Transaction Costs

ROOM T203, TROIAS BUILDING

ABSTRACT

We consider an Itô-financial market at which the risky assets' returns are derived endogenously through a market-clearing condition amongst heterogeneous risk-averse investors with quadratic preferences and random endowments. Investors act strategically by taking into account the impact that their orders have on the assets' drift. A frictionless market and an one with quadratic transaction costs are analysed and compared. In the former, we derive the unique Nash equilibrium at which investors' demand processes reveal different hedging needs than their true ones, resulting in a deviation of the Nash equilibrium from its competitive counterpart. Under price impact and transaction costs, we characterize the Nash equilibrium through the (unique) solution of a system of FBSDEs and derive its closed-form expression. We furthermore show that under common risk aversion and absence of noise traders, transaction costs do not change the equilibrium returns. On the contrary, when noise traders are present, the effect of transaction costs on equilibrium returns is amplified due to price impact.

This is a join work with C. Stefanakis (Un. of Piraeus).