  We consider an Ito-financial market at which the risky assets' returns are
derived endogenously through a market-clearing condition amongst heterogeneous
risk-averse investors with quadratic preferences and random endowments.
Investors act strategically by taking into account the impact that their orders
have on the assets' drift. A frictionless market and an one with quadratic
transaction costs are analysed and compared. In the former, we derive the
unique Nash equilibrium at which investors' demand processes reveal different
hedging needs than their true ones, resulting in a deviation of the Nash
equilibrium from its competitive counterpart. Under price impact and
transaction costs, we characterize the Nash equilibrium as the (unique)
solution of a system of FBSDEs and derive its closed-form expression. We
furthermore show that under common risk aversion and absence of noise traders,
transaction costs do not change the equilibrium returns. On the contrary, when
noise traders are present, the effect of transaction costs on equilibrium
returns is amplified due to price impact.
