Asset Pricing Puzzles and Price-Impact
65 Pages Posted: 16 Oct 2019 Last revised: 26 Feb 2021
Date Written: October 6, 2019
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
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