Benign Granularity in Asset Markets

Sergei Glebkin, Semyon Malamud and Alberto Mokak Teguia
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Sergei Glebkin: INSEAD
Semyon Malamud: Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute
Alberto Mokak Teguia: University of British Columbia (UBC)

No 25-97, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We develop a tractable model to study how asset concentration among a few large investors impacts asset prices and liquidity. Consistent with existing empirical evidence: (i) greater concentration is associated with higher volatility and returns, and (ii) large investors' turnover share is smaller than their proportion of total wealth. Surprisingly, higher concentration enhances liquidity, aligning with our new empirical findings. We show that increased concentration can benefit all investors in sufficiently non-competitive markets. We link the wedge between competitive and non-competitive outcomes to the Herfindahl-Hirschman Index measuring wealth concentration. The wedge can remain positive even in large markets.

Keywords: Market Liquidity; Funding Liquidity; Price Impact; Strategic Trading (search for similar items in EconPapers)
JEL-codes: G31 G32 G35 L11 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2025-04
New Economics Papers: this item is included in nep-fdg and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2597

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