Price impact under heterogeneous beliefs and restricted participation

Michail Anthropelos and Constantinos Kardaras

Papers from arXiv.org

Abstract: We consider a financial market in which traders potentially face restrictions in trading some of the available securities. Traders are heterogeneous with respect to their beliefs and risk profiles, and the market is assumed thin: traders strategically trade against their price impacts. We prove existence and uniqueness of a corresponding equilibrium, and provide an efficient algorithm to numerically obtain the equilibrium prices and allocations given market's inputs. Surprisingly, we find that restrictions may increase the market's welfare if traders have different views regarding the covariance matrix of the securities' returns.

Date: 2018-02, Revised 2021-11
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