/pdf/convex-analysisnoer-san-nojin-zhan-nituite-5dl2rbmoyr.pdf

Convex Analysisの二,三の進展について

Few areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy.

/pdf/capital-regulation-risk-taking-and-monetary-policy-a-missing-4virgvq8ix.pdf

Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism?

Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?

I show that investment in housing plays a crucial role in explaining the patterns of cross sectional variation in the composition of wealth and the level of stockholdings observed in portfolio composition data. Due to investment in housing, younger and poorer investors have limited financial wealth to invest in stocks, which reduces the benefits of equity market participation. House price risk crowds out stockholdings, but this crowding out effect is larger for low financial net-worth. Transaction costs of changing houses reduce the frequency of house trades and also lead investors to reduce their exposure to stocks. In the model as in the data leverage is positively correlated with stockholdings.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID258428_code010201130.pdf?abstractid=258428&mirid=1&type=2

Portfolio Choice in the Presence of Housing

https://isiarticles.com/bundles/Article/pre/pdf/49675.pdf

Momentum and post-earnings-announcement drift anomalies: The role of liquidity risk☆

We consider the optimal intertemporal consumption and investment policy of a constant absolute risk aversion (CARA) investor who faces fixed and proportional transaction costs when trading multiple risky assets. We show that when asset returns are uncorrelated, the optimal investment policy is to keep the dollar amount invested in each risky asset between two constant levels and upon reaching either of these thresholds, to trade to the corresponding optimal targets. An extensive analysis suggests that transaction cost is an important factor in affecting trading volume and that it can significantly diminish the importance of stock return predictability as reported in the literature. THIS PAPER STUDIES THE OPTIMAL INTERTEMPORAL CONSUMPTION and investment policy of an investor with a constant absolute risk aversion (CARA) preference and an infinite horizon. The investor can trade in one risk-free asset and n ≥ 1 risky assets. In contrast to the standard setting, the investor faces both fixed and proportional transaction costs in trading any of these risky assets. In the absence of transaction costs and when risky asset prices follow geometric Brownian motions, the optimal investment policy is to keep a constant dollar amount in each risky asset, as shown by Merton (1971). This trading strategy requires continuous trading in all the risky assets. In addition, the optimal consumption is affine in the total wealth. In the presence of transaction costs, however, trading continuously in a risky asset would incur infinite transaction costs. Therefore, risky assets are traded only infrequently in this case. The literature on optimal consumption and investment with multiple risky assets subject to transaction costs is limited. Leland (2000) examines a multiasset investment fund that is subject to transaction costs and capital gains taxes. Under the assumption that the fund has an exogenous target for each risky asset, he develops a relatively simple numerical procedure to compute the no-transaction region. Akian, Menaldi, and Sulem (1996) consider an optimal consumption and investment problem with proportional transaction costs for

/pdf/optimal-consumption-and-investment-with-transaction-costs-32ye3naf68.pdf

Optimal Consumption and Investment with Transaction Costs and Multiple Risky Assets

We present a simple, Glosten-Milgrom type equilibrium model to analyze the decision of informed traders on whether to use limit or market orders. We show that even after incorporating an order's price impact, not only may informed traders prefer to use limit orders, but the probability that they submit limit orders can be so high that limit orders convey more information than market orders. We further show that the horizon of the private information is critical for this decision and is positively related to the use of limit orders. Our empirical analysis using TORQ suggests that informed traders do prefer limit orders to market orders and that limit orders are indeed more informative. Our model is in contrast to the literature that assumes that informed traders use market orders only and the literature that examines the limit order versus the market order decision of uninformed traders.

So What Orders Do Informed Traders Use

We examine the optimal trading strategy for a CRRA investor who maximizes the expected utility of wealth on a finite date and faces transaction costs. Closed-form solutions are obtained when this date is uncertain. We then show a sequence of analytical solutions converge to the solution to the problem with a deterministic finite horizon. Consistent with the common life-cycle investment advice, the optimal trading strategy is found to be horizon dependent and largely buy and hold. Moreover, it might be optimal for the investor in our model not to buy any stock, even when the risk premium is positive. Further analysis of the optimal policy is also provided. Financial advisers typically recommend that younger investors should allocate a greater share of wealth to stocks than older investors and all investors

/pdf/optimal-portfolio-selection-with-transaction-costs-and-1v5vr1utgi.pdf

Optimal Portfolio Selection with Transaction Costs and Finite Horizons

We present a simple, Glosten-Milgrom type equilibrium model to analyze the decision of informed traders on whether to use limit or market orders. We show that even after incorporating an order’s price impact, not only may informed traders prefer to use limit orders, but the probability that they submit limit orders can be so high that limit orders convey more information than market orders. We further show that the horizon of the private information is critical for this decision and is positively related to the use of limit orders. Our empirical analysis using TORQ suggests that informed traders do prefer limit orders to market orders and that limit orders are indeed more informative. Our model is in contrast to the literature that assumes that informed traders use market orders only and the literature that examines the limit order versus the market order decision of uninformed traders.

https://www.jstor.org/stable/10.1086/503651

Standard literature concludes that transaction costs only have a second-order effect on liquidity premia. We show that this conclusion depends crucially on the assumption of a constant investment opportunity set. In a regime-switching model in which the investment opportunity set varies over time, we explicitly characterize the optimal consumption and investment strategy. In contrast to the standard literature, we find that transaction costs can have a first-order effect on liquidity premia. However, with reasonably calibrated parameters, the presence of transaction costs still cannot fully explain the equity premium puzzle. TRANSACTION COSTS ARE PREVALENT in almost all financial markets. Extensive research has been conducted on the optimal consumption and investment policy in the presence of transaction costs since the seminal work of Constantinides (1979, 1986). The presence of transaction costs significantly changes optimal consumption and investment strategies. For example, in the presence of transaction costs, continuous trade incurs infinite transaction costs, and thus even a small transaction cost can dramatically decrease the frequency of trade. However, most studies find that the utility loss due to the presence of transaction costs is small. In particular, Constantinides (1986) finds that the liquidity premium (i.e., the maximum expected return an investor is willing to exchange for zero transaction cost) is small relative to the transaction cost, even for a suboptimal trading strategy, and hence concludes that transaction costs only have a second-order effect for asset pricing. Indeed, in this framework it seems unlikely that transaction costs can have an important role in explaining the cross-sectional patterns of expected returns, the equity premium puzzle, or the small stock risk premia. This finding contrasts with many empirical studies that highlight the importance of transaction costs or related measures such as turnover in influencing the cross-sectional patterns of expected returns. 1

/pdf/liquidity-premia-and-transaction-costs-11b40o4ljx.pdf

Hong Liu

Papers

Optimal Consumption and Investment with Transaction Costs and Multiple Risky Assets

So What Orders Do Informed Traders Use

Optimal Portfolio Selection with Transaction Costs and Finite Horizons

So What Orders Do Informed Traders Use

Liquidity Premia and Transaction Costs