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Large investors: implications for equilibrium asset, returns, shock absorption, and liquidity

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  • Matthew Pritsker
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    Abstract

    The growing share of financial assets that are held and managed by large institutional investors whose desired trades move asset prices is at odds with the traditional competitive assumption that investors are small and take prices as given. This paper relaxes the traditional price-taking assumption and instead presents a dynamic multiple asset model of imperfect competition in asset markets among large investors who differ in their risk aversion. The model is used to study asset price dynamics during an LTCM-like scenario in which market rumors of distressed asset sales are followed at a later date by the sales themselves. Using the model, it is shown that large investors front-run distressed sales; asset prices overshoot their long-run fundamentals; and asset pricing models experience temporary breakdown. During the period of model breakdown assets equilibrium returns are explained by the market portfolio and by transient liquidity factors.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2005-36.

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    Date of creation: 2005
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    Handle: RePEc:fip:fedgfe:2005-36

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    Keywords: Equilibrium (Economics) ; Capital assets pricing model ; International finance;

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    Cited by:
    1. Yaw Mensah & Robert Werner, 2008. "The capital market implications of the frequency of interim financial reporting: an international analysis," Review of Quantitative Finance and Accounting, Springer, vol. 31(1), pages 71-104, July.
    2. Wissem Bouaziz & Abdelfettah Bouri, 2012. "Ownership structure and financial institutes risk taking: evidence from Tunisian quoted bank (financial institute)," International Journal of Managerial and Financial Accounting, Inderscience Enterprises Ltd, vol. 4(1), pages 47-60.

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