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Equilibrium bid-ask spread and infrequent trade with outside options

Author

Listed:
  • Elisa Luciano
  • Riccardo Giacomelli

Abstract

The paper studies the equilibrium bid-ask spread and time-to-trade in a continuous-time, intermediated financial market. The trading price process, inclusive of spreads, is optimally determined by intermediaries. Investors optimally determine time-to-trade. Spreads and trading times are asymmetric in the difference of risk aversions between market participants, while they are symmetric in physical trading costs. We detect a bias towards cash. Optimal trade is drastically reduced when spreads increase, so as to preserve the investors' welfare. Random switches to a competitive market drastically reduce bid-ask fees, but leave trade features and asymmetries unaffected.

Suggested Citation

  • Elisa Luciano & Riccardo Giacomelli, 2016. "Equilibrium bid-ask spread and infrequent trade with outside options," Carlo Alberto Notebooks 445, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:445
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    File URL: https://www.carloalberto.org/wp-content/uploads/2018/11/no.445.pdf
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    More about this item

    Keywords

    equilibrium with transaction costs; equilibrium with intermediaries; infrequent trading; trading volume; endogenous bid-ask spread; brokers' pricing.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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