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Asset Prices and Liquidity with Market Power and Non-Gaussian Payoffs

Author

Listed:
  • Sergei Glebkin

    (INSEAD)

  • Semyon Malamud

    (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute)

  • Alberto Teguia

    (Rice University, Jesse H. Jones Graduate School of Business, Students)

Abstract

We consider an economy populated by CARA investors who trade, accounting for their price impact, multiple risky assets with arbitrary distributed payoffs. We propose a constructive solution method: finding the equilibrium reduces to solving a linear ordinary differential equation. With market power and non-Gaussian payoffs: (i) the equilibrium is nonlinear and the model can speak to key stylized facts regarding asymmetry and nonlinearity of price response to order imbalances, (ii) when risk aversion decreases, there are more liquidity providers and/or there is less uncertainty about future asset payoffs, liquidity can decrease, (iii) cross-section of returns is affected by endogenous illiquidity.

Suggested Citation

  • Sergei Glebkin & Semyon Malamud & Alberto Teguia, 2020. "Asset Prices and Liquidity with Market Power and Non-Gaussian Payoffs," Swiss Finance Institute Research Paper Series 20-80, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2080
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3692589
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    Cited by:

    1. Curatola, Giuliano, 2022. "Price impact, strategic interaction and portfolio choice," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    2. Hugues Dastarac, 2021. "Strategic Trading, Welfare and Prices with Futures Contracts," Working papers 841, Banque de France.

    More about this item

    Keywords

    Price Impact; Higher Cumulants; Strategic Trading; Liquidity; CAPM;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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