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Price impact equilibrium with transaction costs and TWAP trading

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  • Eunjung Noh
  • Kim Weston

Abstract

We prove the existence of an equilibrium in a model with transaction costs and price impact where two agents are incentivized to trade towards a target. The two types of frictions -- price impact and transaction costs -- lead the agents to two distinct changes in their optimal investment approach: price impact causes agents to continuously trade in smaller amounts, while transaction costs cause the agents to cease trading before the end of the trading period. As the agents lose wealth because of transaction costs, the exchange makes a profit. We prove the existence of a strictly positive optimal transaction cost from the exchange's perspective.

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  • Eunjung Noh & Kim Weston, 2020. "Price impact equilibrium with transaction costs and TWAP trading," Papers 2002.08286, arXiv.org.
    • Handle: RePEc:arx:papers:2002.08286
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    References listed on IDEAS

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    Cited by:

    1. Xiao Chen & Jin Hyuk Choi & Kasper Larsen & Duane J. Seppi, 2021. "Learning about latent dynamic trading demand," Papers 2105.13401, arXiv.org, revised Aug 2021.

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