Asset Pricing: Frictions and Market Power
Sunday, Jan. 3, 2021 10:00 AM - 12:00 PM (EST)
- Chair: Benjamin Hebert, Stanford University
Resolving Asset-Pricing Puzzles Using Price-Impact
AbstractWe solve in closed-form a continuous-time Nash equilibrium model in which a finite number of exponential investors continuously consume and trade strategically with price-impact. Compared to the analogous Pareto-efficient equilibrium model, price-impact has an amplification effect on risk-sharing distortions that helps resolve the interest rate puzzle and the stock-price volatility puzzle. However, price impact has little effect on the equity premium puzzle.
Arbitrage with Financial Constraints and Market Power
AbstractI study how financial constraints affect liquidity provision and welfare under different structures of the arbitrage industry. In competitive markets, financial constraints may impair arbitrageurs' ability to provide liquidity, thereby reducing other investors' welfare. Instead, in imperfectly competitive markets, I characterize situations in which imposing constraints on arbitrageurs leads to a Pareto improvement relative to a no-constraint case. Further, unlike the competitive case, a drop in arbitrage capital does not always lead to a reduction in market liquidity. A subtle interaction between financial constraints and arbitrageurs' market power generates these Pareto improvement and novel comparative statics.
Price Destabilizing Speculation: The Role of Strategic Limit Orders
AbstractWe show that under quantity competition with only a few strategic sellers, a large speculator with access to storage facilities can destabilize prices and profit from it. Through clever use of a combination of limit and market orders, the speculator can lower the price while buying and raise the price while selling. This creates price volatility even though there is no fundamental uncertainty in the economy and all market participants act rationally. When there is free disposal, the speculator uses a combination of limit and stop-loss order, and the resulting market price is more volatile
- G1 - Asset Markets and Pricing