
Open access
Date
2014-01Type
- Journal Article
Citations
Cited 46 times in
Web of Science
Cited 49 times in
Scopus
ETH Bibliography
yes
Altmetrics
Abstract
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
Permanent link
https://doi.org/10.3929/ethz-b-000061176Publication status
publishedExternal links
Journal / series
Finance and StochasticsVolume
Pages / Article No.
Publisher
SpringerSubject
Transaction costs; Long-run; Portfolio choice; Liquidity premium; Trading volumeOrganisational unit
03899 - Muhle-Karbe, Johannes (ehemalig)
Notes
It was possible to publish this article open access thanks to a Swiss National Licence with the publisher.More
Show all metadata
Citations
Cited 46 times in
Web of Science
Cited 49 times in
Scopus
ETH Bibliography
yes
Altmetrics