Asset pricing with heterogeneous beliefs and illiquidity

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.