Asset Prices and Liquidity with Market Power and Non-Gaussian Payoffs

Sergei Glebkin, Semyon Malamud and Alberto Teguia
Additional contact information
Sergei Glebkin: INSEAD
Semyon Malamud: Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute
Alberto Teguia: Rice University, Jesse H. Jones Graduate School of Business, Students

No 20-80, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We consider an economy populated by CARA investors who trade, accounting for their price impact, multiple risky assets with arbitrary distributed payoffs. We propose a constructive solution method: finding the equilibrium reduces to solving a linear ordinary differential equation. With market power and non-Gaussian payoffs: (i) the equilibrium is nonlinear and the model can speak to key stylized facts regarding asymmetry and nonlinearity of price response to order imbalances, (ii) when risk aversion decreases, there are more liquidity providers and/or there is less uncertainty about future asset payoffs, liquidity can decrease, (iii) cross-section of returns is affected by endogenous illiquidity.

Keywords: Price Impact; Higher Cumulants; Strategic Trading; Liquidity; CAPM (search for similar items in EconPapers)
JEL-codes: D21 G31 G32 G35 L11 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2020-09
New Economics Papers: this item is included in nep-mst and nep-ore
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2080

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