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

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  • Matthew Pritsker

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.

Suggested Citation

  • Matthew Pritsker, 2005. "Large investors: implications for equilibrium asset, returns, shock absorption, and liquidity," Finance and Economics Discussion Series 2005-36, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2005-36
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    2. 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.

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    Keywords

    Equilibrium (Economics); capital asset pricing model; International finance;
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