Asset Pricing Puzzles and Price-Impact

65 Pages Posted: 16 Oct 2019 Last revised: 26 Feb 2021

See all articles by Xiao Chen

Xiao Chen

Rutgers, The State University of New Jersey

Jin Hyuk Choi

Ulsan National Institute of Science and Technology (UNIST)

Kasper Larsen

Rutgers, The State University of New Jersey

Duane J. Seppi

Carnegie Mellon University - David A. Tepper School of Business

Date Written: October 6, 2019

Abstract

We solve in closed-form a continuous-time Nash equilibrium model in which a finite number of investors with exponential utilities continuously consume and trade strategically 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. However, price impact has little quantitative effect on the equity premium and stock-return volatility puzzles.

Keywords: Asset pricing, price-impact, Nash equilibrium, Radner equilibrium, Pareto-efficient equilibrium, risk-free rate puzzle

JEL Classification: G11, G12

Suggested Citation

Chen, Xiao and Choi, Jin Hyuk and Larsen, Kasper and Seppi, Duane J., Asset Pricing Puzzles and Price-Impact (October 6, 2019). Available at SSRN: https://ssrn.com/abstract=3465159 or http://dx.doi.org/10.2139/ssrn.3465159

Xiao Chen

Rutgers, The State University of New Jersey ( email )

311 North 5th Street
New Brunswick, NJ 08854
United States

Jin Hyuk Choi (Contact Author)

Ulsan National Institute of Science and Technology (UNIST) ( email )

gil 50
Ulsan, 689-798
Korea, Republic of (South Korea)

Kasper Larsen

Rutgers, The State University of New Jersey ( email )

311 North 5th Street
New Brunswick, NJ 08854
United States

Duane J. Seppi

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-2298 (Phone)
412-268-8896 (Fax)

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