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

73 Pages Posted: 15 Sep 2020 Last revised: 16 Sep 2020

See all articles by Sergei Glebkin

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

Date Written: February 4, 2020

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.

Keywords: Price Impact, Higher Cumulants, Strategic Trading, Liquidity, CAPM

JEL Classification: D21, G31, G32, G35, L11

Suggested Citation

Glebkin, Sergei and Malamud, Semyon and Teguia, Alberto, Asset Prices and Liquidity with Market Power and Non-Gaussian Payoffs (February 4, 2020). Swiss Finance Institute Research Paper No. 20-80, Available at SSRN: https://ssrn.com/abstract=3692589 or http://dx.doi.org/10.2139/ssrn.3692589

Sergei Glebkin

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Alberto Teguia

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

Houston, TX
United States

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