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Liquidity generated by heterogeneous beliefs and costly estimations

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Author Info

  • Min Shen

    ()
    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)

  • Gabriel Turinici

    ()
    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)

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    Abstract

    We study the liquidity, de ned as the size of the trading volume, in a situation where an in nite number of agents with heterogeneous beliefs reach a trade-o between the cost of a precise estimation (variable depending on the agent) and the expected wealth from trading. The \true" asset price is not known and the market price is set at a level that clears the market. We show that, under some technical assumptions, the model has natural properties such as monotony of supply and demand functions with respect to the price, existence of an equilibrium and monotony with respect to the marginal cost of information. We also situate our approach within the Mean Field Games (MFG) framework of Lions and Lasry which allows to obtain an interpretation as a limit of Nash equilibrium for an in nite number of agents.

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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number hal-00638966.

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    Date of creation: 01 Jun 2012
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    Publication status: Published, Networks and Heterogeneous Media, 2012, 7, 2, 349 - 361
    Handle: RePEc:hal:journl:hal-00638966

    Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00638966
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    Web page: http://hal.archives-ouvertes.fr/

    Related research

    Keywords: liquidity ; liquidity risk ; transaction volume ; liquidity model ; Mean Field Games ; trading volume ; information cost ; heterogeneous liquidity ; heterogeneous beliefs ; research cost;

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    1. Clotilde Napp & Elyès Jouini, 2006. "Aggregation of Heterogeneous Beliefs," Post-Print halshs-00151562, HAL.
    2. Marco Avellaneda & Sasha Stoikov, 2008. "High-frequency trading in a limit order book," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 217-224.
    3. Jouini, Elyès & Napp, Clotilde, 2006. "Heterogeneous Beliefs and Asset Pricing in Discrete Time : an Analysis of Pessimism and Doubt," Economics Papers from University Paris Dauphine 123456789/341, Paris Dauphine University.
    4. Michael Gallmeyer & Burton Hollifield, 2008. "An Examination of Heterogeneous Beliefs with a Short-Sale Constraint in a Dynamic Economy," Review of Finance, European Finance Association, vol. 12(2), pages 323-364.
    5. Jouini, Elyes & Napp, Clotilde, 2006. "Heterogeneous beliefs and asset pricing in discrete time: An analysis of pessimism and doubt," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1233-1260, July.
    6. Napp, Clotilde & Jouini, Elyès, 2006. "Aggregation of Heterogeneous Beliefs," Economics Papers from University Paris Dauphine 123456789/80, Paris Dauphine University.
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