Equilibrium bid-ask spread and infrequent trade with outside options

Elisa Luciano and Riccardo Giacomelli

No 445, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: The paper studies the equilibrium bid-ask spread and time-to-trade in a continuous-time, intermediated financial market. The trading price process, inclusive of spreads, is optimally determined by intermediaries. Investors optimally determine time-to-trade. Spreads and trading times are asymmetric in the difference of risk aversions between market participants, while they are symmetric in physical trading costs. We detect a bias towards cash. Optimal trade is drastically reduced when spreads increase, so as to preserve the investors' welfare. Random switches to a competitive market drastically reduce bid-ask fees, but leave trade features and asymmetries unaffected.

Keywords: equilibrium with transaction costs; equilibrium with intermediaries; infrequent trading; trading volume; endogenous bid-ask spread; brokers' pricing. (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: pages 54
Date: 2016
New Economics Papers: this item is included in nep-mst
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.carloalberto.org/wp-content/uploads/2018/11/no.445.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:445

Access Statistics for this paper

More papers in Carlo Alberto Notebooks from Collegio Carlo Alberto Contact information at EDIRC.
Bibliographic data for series maintained by Giovanni Bert ().