- Journal Article
Rights / licenseIn Copyright - Non-Commercial Use Permitted
In a market with one safe and one risky asset, an investor with a long horizon, constant investment opportunities and constant relative risk aversion trades with small proportional transaction costs. We derive explicit formulas for the optimal investment policy, its implied welfare, liquidity premium, and trading volume. At the first order, the liquidity premium equals the spread, times share turnover, times a universal constant. The results are robust to consumption and finite horizons. We exploit the equivalence of the transaction cost market to another frictionless market, with a shadow risky asset, in which investment opportunities are stochastic. The shadow price is also found explicitly. Show more
Journal / seriesFinance and Stochastics
Pages / Article No.
SubjectTransaction costs; Long-run; Portfolio choice; Liquidity premium; Trading volume
Organisational unit03899 - Muhle-Karbe, Johannes (ehemalig)
NotesIt was possible to publish this article open access thanks to a Swiss National Licence with the publisher.
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