Abstract

http://ssrn.com/abstract=1411943
 
 

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Price Pressures


Terrence Hendershott


University of California, Berkeley - Haas School of Business

Albert J. Menkveld


VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA); Duisenberg School of Finance

June 30, 2014

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
We study price pressures, i.e., deviations from the efficient price due to risk-averse intermediaries supplying liquidity to asynchronously arriving investors. Empirically, New York Stock Exchange intermediary data reveals economically large price pressures, 0.49% on average with a half life of 0.92 days. Theoretically, a simple dynamic inventory model captures an intermediary’s use of price pressure to mean-revert inventory. She trades off revenue loss due to price pressure against price risk associated with staying in a nonzero inventory state. The closed-form solution identifies the intermediary’s risk aversion and the investors’ private value distribution from the observed time series patterns of prices and inventories. These parameters imply a relative social cost due to price pressure, a deviation from constrained Pareto efficiency, of approximately 10% of the cost of immediacy.

Number of Pages in PDF File: 33

Keywords: liquidity, inventory risk, intermediary, volatility

JEL Classification: G12, G14, D53, D61

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Date posted: May 31, 2009 ; Last revised: July 1, 2014

Suggested Citation

Hendershott, Terrence and Menkveld, Albert J., Price Pressures (June 30, 2014). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1411943

Contact Information

Terrence J. Hendershott
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
Albert J. Menkveld (Contact Author)
VU University Amsterdam ( email )
De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)
Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )
Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands
Duisenberg School of Finance ( email )
Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands
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