Work

Liquidity in Competitive Dealer Markets

Year: 2018

Type: article

Abstract: We study a continuous‐time version of the intermediation model of Grossman and Miller. To wit, we solve for the competitive equilibrium prices at which liquidity takers' demands are absorbed by dealers with quadratic inventory costs, who can in turn gradually transfer these positions to an exogenous open market with finite liquidity. This endogenously leads to transient price impact in the dealer market. Smooth, diffusive, and discrete trades all incur finite but nontrivial liquidity costs, and can arise naturally from the liquidity takers' optimization.

Source: Mathematical Finance

DOI: 10.1111/mafi.12305

Authors: Peter Bank, Ibrahim Ekren, Johannes Muhle‐Karbe

Institutions: Technische Universität Berlin, Florida State University, Imperial College London

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,840

Funder: Eidgenössische Technische Hochschule Zürich