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Resolving asset pricing puzzles using price-impact

We solve in closed-form an equilibrium model in which a finite number of exponential investors continuously consume and trade 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 and the stock-price volatility puzzle and, to a lesser extent, affects the equity premium puzzle.

preprint2020arXivOpen access

Xiao Chen Jin Hyuk Choi Kasper Larsen Duane J. Seppi

q-fin.MF

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Xiao Chen Jin Hyuk Choi Kasper Larsen Duane J. Seppi

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