Small transaction costs made frequent trading become a common practice among financial institutions and retail investors. Yet, the existing models of trading in the presence of transaction costs predict that trading should be infrequent. This study considers the effects of convex transaction...

This paper studies the effects that delays in capital allocations in the stock market and high short-term trading incentives have on returns of this market. We report that capital inertia makes the Sharpe ratio and the volatility of the stock returns many times higher than in an economy with no...

We show that the presence of short-term overreaction in a stock price could make estimates of the conditional moments of stock returns be strongly affected by the frequency of time series. This conclusion implies that the other measures of stock returns, such as the conditional Sharpe ratio, its...

A portfolio optimization problem for an investor who trades T-bills and a mean-reverting stock in the presence of proportional and convex transaction costs is considered. The proportional transaction cost represents a bid-ask spread, while the convex transaction cost is used to model delays in...

We analyze a portfolio optimization problem for a long-term investor in the presence of stock market crises. A crisis includes a crash of the stock market price, a sharp increase of its volatility and dramatic deterioration of liquidity. We model the stock market illiquidity by means of convex...

We consider an equilibrium in illiquid stock market in which liquidity suppliers trade with investors and face significant trading costs. A similar situation was observed during the recent financial crisis. We find that the expected risk premium on the stock and its Sharpe ratio are positive and...

We extend the theory of super-replicating a European option by relaxing its two main assumptions: We take into account the constraints on trading the option and allow it to be traded inter-temporally. The first extension has a dramatic effect on the price of a portfolio hedging the option, while...