Price impact under heterogeneous beliefs and restricted participation

DOI10.1016/J.JET.2023.105774arXiv1802.09954OpenAlexW4389670430MaRDI QIDQ6139988FDOQ6139988

Authors: Michail Anthropelos, Constantinos Kardaras 

Publication date: 19 January 2024

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

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.

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)

Cites Work

• Existence of financial equilibria with restricted participation
• Microeconomic theory
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• Strategic Trading and Welfare in a Dynamic Market
• Endogenous market power
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• Generic existence of competitive equilibria with restricted participation
• The effect of market power on risk-sharing
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• Effective risk aversion in thin risk‐sharing markets
• Limits to arbitrage when market participation is restricted
• Exchange Design and Efficiency

Cited In (2)

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

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