Resolving asset pricing puzzles using price-impact
Mathematical Finance
2020-06-03 v3
Abstract
We solve in closed-form an equilibrium model in which a finite number of exponential investors continuously consume and trade with price-impact. Compared to the analogous Pareto-efficient equilibrium model, price-impact has an amplification effect on risk-sharing distortions that helps resolve the interest rate puzzle and the stock-price volatility puzzle and, to a lesser extent, affects the equity premium puzzle.
Cite
@article{arxiv.1910.02466,
title = {Resolving asset pricing puzzles using price-impact},
author = {Xiao Chen and Jin Hyuk Choi and Kasper Larsen and Duane J. Seppi},
journal= {arXiv preprint arXiv:1910.02466},
year = {2020}
}