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Price impact under heterogeneous beliefs and restricted participation

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  • Anthropelos, Michail
  • Kardaras, Constantinos

Abstract

We consider a financial market in which traders potentially face restrictions in trading some of the available securities. Traders are heterogeneous with respect to their beliefs and risk profiles, and the market is assumed thin: traders strategically trade against their price impacts. We prove existence and uniqueness of a corresponding equilibrium, and provide an efficient algorithm to numerically obtain the equilibrium prices and allocations given market's inputs. We find that restrictions may increase the market's welfare if traders have different views regarding the covariance matrix of securities returns. The latter heterogeneity regarding covariance matrix disagreement is essential in modelling; for instance, when traders agree on the covariance matrix, restricting participation in some securities for some traders leaves equilibrium prices unaltered in the unrestricted securities, a certainly undesirable model effect.

Suggested Citation

  • Anthropelos, Michail & Kardaras, Constantinos, 2024. "Price impact under heterogeneous beliefs and restricted participation," LSE Research Online Documents on Economics 121058, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:121058
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    File URL: http://eprints.lse.ac.uk/121058/
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    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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