Mathematical Finance Seminar
Kasper Larsen (Rutgers U)

Asset-pricing puzzles and price-impact

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. Joint work with Xiao Chen (Rutgers), Jin Hyuk Choi (UNIST), and Duane J. Seppi (CMU).