Equilibrium price of immediacy and infrequent trade

Riccardo Giacomelli and Elisa Luciano

No 221, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: The paper studies the equilibrium value of bid-ask spreads and time- to-trade in a continuous-time, intermediated fi?nancial market. The en- dogenous spreads are the price at which brokers are willing to offer imme- diacy. They include physical trading costs. Traders intervene optimally, when the portfolio mix reaches endogenously determined barriers. Spreads and times between successive trades are increasing with the difference in agents risk attitudes. They react asymmetrically to an increase in the difference of risk aversions, while they are symmetric in trading costs. We detect a bias towards cash. Optimal trade is drastically reduced when costs increase, so as to preserve the investors welfare. Random switches to a competitive market, to be interpreted as outside options, drastically reduce bid-ask fees.

Keywords: equilibrium with dealers; equilibrium with bid-ask spreads; endogenous bid-ask; dynamic market making (search for similar items in EconPapers)
JEL-codes: C61 D53 G10 G12 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2011, Revised 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:221

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