A Competitive Search Theory of Asset Pricing

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See all articles by Mahyar Kargar

Mahyar Kargar

University of Illinois at 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. The model nests standard asset pricing and competitive search models as special cases. Trade is intermediated by risk-neutral dealers subject to capacity constraints. Investors can direct their search towards dealers based on price and execution speed. Order flows affect the risk premium, volatility, and equilibrium interest rate. Large negative shocks lead to portfolio reallocations and increased trading volume, bid-ask spreads, and trading delays. Simultaneously, the model generates increased risk premium and volatility and a reduction in interest rates, consistent with asset-pricing and trading behavior in recent crisis episodes.

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

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=

Mahyar Kargar (Contact Author)

University of Illinois at 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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