A Competitive Search Theory of Asset Pricing

75 Pages Posted: 7 Dec 2020 Last revised: 30 Apr 2021

See all articles by Mahyar Kargar

Mahyar Kargar

University of Illinois Urbana-Champaign - Department of Finance

Juan Passadore

Einaudi Institute for Economics and Finance (EIEF)

Dejanir Silva

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: November 15, 2020

Abstract

We develop an asset-pricing model with heterogeneous investors and search frictions. Trade is intermediated by risk-neutral dealers subject to capacity constraints. Risk-averse investors can direct their search towards dealers based on price and execution speed. Order flows affect the risk premium, volatility, and equilibrium interest rate. We propose a new solution method to characterize the equilibrium analytically. We assess the quantitative implications of the model in response to a large adverse shock. Consistent with the empirical evidence from the COVID-19 crisis, we find an increase in the risk premium and market illiquidity, and a decline in interest rates.

Keywords: Asset pricing, competitive search, market liquidity, perturbation techniques

JEL Classification: G11, G12, D53

Suggested Citation

Kargar, Mahyar and Passadore, Juan and Silva, Dejanir, A Competitive Search Theory of Asset Pricing (November 15, 2020). Available at SSRN: https://ssrn.com/abstract=3731019 or http://dx.doi.org/10.2139/ssrn.3731019

Mahyar Kargar (Contact Author)

University of Illinois Urbana-Champaign - Department of Finance ( email )

Champaign, IL 61820
United States

HOME PAGE: http://mahyarkargar.com

Juan Passadore

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Dejanir Silva

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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