Asset Pricing with Heterogeneous Beliefs and Illiquidity

35 Pages Posted: 4 Jun 2019

See all articles by Johannes Muhle-Karbe

Johannes Muhle-Karbe

Imperial College London - Department of Mathematics

Marcel Nutz

Columbia University

Xiaowei Tan

Columbia University - Department of Mathematics

Date Written: May 14, 2019

Abstract

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.

Keywords: Equilibrium, Liquidity, Heterogeneous Beliefs

JEL Classification: C68, D52, G11, G12

Suggested Citation

Muhle-Karbe, Johannes and Nutz, Marcel and Tan, Xiaowei, Asset Pricing with Heterogeneous Beliefs and Illiquidity (May 14, 2019). Available at SSRN: https://ssrn.com/abstract=3388212 or http://dx.doi.org/10.2139/ssrn.3388212

Johannes Muhle-Karbe (Contact Author)

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
Imperial College
LONDON, SW7 2AZ
United Kingdom

Marcel Nutz

Columbia University ( email )

Xiaowei Tan

Columbia University - Department of Mathematics ( email )

United States

Register to save articles to
your library

Register

Paper statistics

Downloads
21
Abstract Views
108
PlumX Metrics