# Asset Pricing with Heterogeneous Beliefs and Illiquidity

## TL;DR

This paper develops a tractable model for asset pricing in continuous time with heterogeneous beliefs and illiquidity, revealing how costs influence equilibrium prices and deriving asymptotic insights for small transaction costs.

## Contribution

It introduces a novel equilibrium model incorporating heterogeneous beliefs and liquidity costs, characterized by a system of linear parabolic equations.

## Key findings

- Equilibrium prices are characterized by coupled linear parabolic equations.
- Holding and liquidity costs have dual effects on asset prices.
- Asymptotic analysis provides insights into effects of small transaction costs.

## Abstract

This paper studies the equilibrium price of an asset that is traded in continuous time between N agents who have heterogeneous beliefs about the state process underlying the asset's payoff. We propose a tractable model where agents maximize expected returns under quadratic costs on inventories and trading rates. The unique equilibrium price is characterized by a weakly coupled system of linear parabolic equations which shows that holding and liquidity costs play dual roles. We derive the leading-order asymptotics for small transaction and holding costs which give further insight into the equilibrium and the consequences of illiquidity.