Equilibrium under TWAP trading with quadratic transaction costs
arXiv:2008.00908
Abstract
We study how transaction cost affects to the equilibrium return and optimal stock holdings in equilibrium. To this end, we develop a continuous-time risk-sharing model where heterogenous agents trade toward terminal target holdings subject to a quadratic transaction cost. The equilibrium stock holdings and trading rate under transaction cost are characterized by a unique solution to a forward-backward stochastic differential equation (FBSDE). The equilibrium return is also characterized as the unique solution of a system of coupled but linear FBSDEs.
I find serious fundamental mistakes, so I would like to withdraw the paper. I will work again and upload later