Price impact under heterogeneous beliefs and restricted participation

DOI10.1016/J.JET.2023.105774MaRDI QIDQ6139988OpenAlexFDO

Authors Michail Anthropelos, Constantinos Kardaras

Publication date 19 January 2024

Published in Journal of Economic Theory (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1802.09954

zbMATH Keywords

price impactheterogeneous beliefswelfarethin marketsrestricted participationdisagreement on second moments

Mathematics Subject Classification ID

Financial markets (91G15) Heterogeneous agent models (91B69)

Abstract: We consider a financial market in which traders potentially face restrictions in trading some of the available securities. Traders are heterogeneous with respect to their beliefs and risk profiles, and the market is assumed thin: traders strategically trade against their price impacts. We prove existence and uniqueness of a corresponding equilibrium, and provide an efficient algorithm to numerically obtain the equilibrium prices and allocations given market's inputs. Surprisingly, we find that restrictions may increase the market's welfare if traders have different views regarding the covariance matrix of the securities' returns.

Recommendations

• Asset pricing with heterogeneous beliefs and illiquidity
• Market selection with differential financial constraints
• Effective risk aversion in thin risk‐sharing markets
• Price impact in Nash equilibria
• Endogenous market power

Cites work

• A general equilibrium analysis of strategic arbitrage
• Arbitrage and equilibrium with portfolio constraints
• Competitive equilibrium with incomplete financial markets
• Continuous Auctions and Insider Trading
• Effective risk aversion in thin risk‐sharing markets
• Endogenous market integration, manipulation and limits to arbitrage
• Endogenous market power
• Endogenous restricted participation in general financial equilibrium
• Equilibrium in risk-sharing games
• Exchange Design and Efficiency
• Existence of financial equilibria with restricted participation
• Generic existence of competitive equilibria with restricted participation
• Informed Speculation with Imperfect Competition
• Limits to arbitrage when market participation is restricted
• Microeconomic theory
• Price Manipulation and Quasi-Arbitrage
• Stochastic equilibria with incomplete financial markets
• Strategic Trading and Welfare in a Dynamic Market
• Strategic supply function competition with private information
• The effect of market power on risk-sharing

Cited in

(2)

• Existence of an equilibrium with limited participation
• Competition in schedules with cursed traders

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