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Finance:
It is now well
documented that large institutional investors have significant price impact
and they mitigate its adverse effects when choosing their trading
strategies.
The competitive equilibrium asset-pricing models, such as CAPM or
consumption CAPM, assume price-taking and are thus not suitable to model
markets with such large investors. We build a dynamic model with multiple
assets in which traders take into account their impact on prices. To our
knowledge, we are the first to derive equilibrium for non-competitive
markets in which the price impact does not arise due to asymmetric
information or exogenous costs (transaction, search or financing). Rather,
it is derived from the market primitives: number of traders, return
variability and risk attitudes.
- "Frequent Trading and Price Impact
in Thin Markets,"
(with
Marek Weretka) December
2006,
pdf
The model predicts that the price
impact is not constant over a trading period, but varies with time-to-maturity. The results match a number of empirical facts
that cannot be reconciled with price-taking behavior: e.g., optimal
execution of trade through breaking-up orders into blocks, asset price overshooting, dynamics of trade volume. Since in the presence of price
impact cash and market values of portfolios no longer coincide, we also study
dynamic asset valuation.
- "Liquidity Concerns in Thin Financial Markets,"
(with Marek
Weretka), in progress
Extensive
empirical evidence shows that assets are priced not only for their risk and
return but also liquidity. We model asset illiquidity as a price concession
required to liquidate a block of assets. In a stochastic non-competitive
model, we show that the interaction of uncertainty about
asset returns with price impact gives rise to equilibrium liquidity premia.
By contrast to the existing literature, liquidity effects arise without appealing to costs or asymmetric information.
Apart from characterizing equilibrium portfolios and prices, this allows us
to ask new questions about behavior of aggregate market liquidity and
cross-market liquidity effects. We study implications for optimal trading
strategies and asset valuation.
Market Design:
- "Discriminatory or Uniform? Design of Divisible Good Auctions," (with Marek
Pycia and Marek Weretka), coming soon
- "Dynamic
Thin Markets,"
(with Marek
Weretka), coming soon
We
identify new effects of market power on dynamic trading in markets where all
traders (buyers and sellers) have market power.
Decision Theory:
- "Quantile Maximization in Decision Theory,"
revised May 2007,
pdf
This paper
introduces a model of preferences in which an individual compares uncertain alternatives through a quantile of the
induced utility distributions. The choice rule of Quantile Maximization nests maxmin and maxmax but also captures less extreme preferences. Although largely ignored in
decision theory literature, quantiles are present in many applied areas of economics: finance (Value at Risk), econometrics (robust
estimation and quantile regression), measurement (population-based poverty lines, order
statistics), and others. The two key distinctive features of the model are robustness (to fat tails) and ordinality (robustness to the assumptions about risk attitudes). Taking preferences over acts
as a primitive, I axiomatize Quantile Maximization in a Savage setting. Check out the new construction of a probability-measure
representation of beliefs
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