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arXiv · 2008.00908

Equilibrium under TWAP trading with quadratic transaction costs

Eunjung Noh
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Abstract

We study how transaction cost affects to the equilibrium return and optimal stock holdings in equilibrium. To this end, we develop a continuous-time risk-sharing model where heterogenous agents trade toward terminal target holdings subject to a quadratic transaction cost. The equilibrium stock holdings and trading rate under transaction cost are characterized by a unique solution to a forward-backward stochastic differential equation (FBSDE). The equilibrium return is also characterized as the unique solution of a system of coupled but linear FBSDEs.

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Eunjung Noh. 2020-08-03. Equilibrium under TWAP trading with quadratic transaction costs. https://arxiv.org/abs/2008.00908

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