Equilibrium price of immediacy and infrequent trade
AbstractThe paper studies the equilibrium value of bid-ask spreads and time- to-trade in a continuous-time, intermediated fi?nancial market. The en- dogenous spreads are the price at which brokers are willing to offer imme- diacy. They include physical trading costs. Traders intervene optimally, when the portfolio mix reaches endogenously determined barriers. Spreads and times between successive trades are increasing with the difference in agents risk attitudes. They react asymmetrically to an increase in the difference of risk aversions, while they are symmetric in trading costs. We detect a bias towards cash. Optimal trade is drastically reduced when costs increase, so as to preserve the investors welfare. Random switches to a competitive market, to be interpreted as outside options, drastically reduce bid-ask fees.
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Bibliographic InfoPaper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 221.
Length: 36 pages
Date of creation: 2011
Date of revision: 2013
equilibrium with dealers; equilibrium with bid-ask spreads; endogenous bid-ask; dynamic market making;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-21 (All new papers)
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