Asset Pricing with Large Investors

Semyon Malamud and Alberto Teguia
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Semyon Malamud: Ecole Polytechnique Federale de Lausanne, Centre for Economic Policy Research (CEPR), and Swiss Finance Institute
Alberto Teguia: Rice University

No 17-57, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We derive closed form expressions for equilibrium asset prices and liquidity in an economy populated by a finite number of large, strategic, risk averse investors. The model allows for arbitrary risk preferences, any number of assets, and an arbitrary distribution of asset payoffs. In equilibrium, assets are priced according to the standard consumption Euler equation plus a correction term accounting for market illiquidity (price impact), linked to an endogenous measure of systemic risk that puts a large weight on low consumption states. Wealth effects imply that price impact is generally asymmetric, which leads to the emergence of endogenous systemic assets: That is, assets whose sell-off triggers large moves in all security prices. Market liquidity is non-monotonic in funding liquidity and may decrease in the number of investors. In the presence of liquidity shortage, price impact becomes negative and gives rise to an illiquidity premium in asset prices.

Keywords: Market Liquidity; Funding Liquidity; Price Impact; Strategic Trading (search for similar items in EconPapers)
JEL-codes: G20 G23 G28 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2017-11
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1757

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