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Lunch Seminar: Dejanir H. Silva - University of Illinois at Urbana-Champaign
Tuesday 23 July 2019, 01:00pm - 02:00pm

Heterogeneity, Trading Frictions, and Asset Prices, joint with Wei Cui and Juan Passadore

Abstract:

We develop an asset pricing model with heterogeneous risk averse investors and search frictions. Trade is intermediated by risk-neutral dealers that trade in a competitive interdealer market. Investor’s direct their search towards markets characterized by a probability of trade and a price. Posting orders in these markets is costly, for both investors and intermediaries. The investor’s willingness to trade depends on the expected deviations from the actual portfolio share to a target Mertonian portfolio. A larger deviation from the target portfolio leads to more intensive trading, a reduction in the probability of an order being executed, and an increase in the compensation of intermediaries. In equilibrium, search frictions will affect both the level and variation of the liquidity and risk premia.

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