Working Papers

Abstract.  I investigate asset price dynamics in a slow-moving capital economy where arbitrageurs subject to convex trading costs exploit price discrepancies across segmented markets. In equilibrium, arbitrageurs encounter linear price impact costs without risk constraints; however, concave market impacts emerge under risk constraints. The model identifies two economic mechanisms: 'Risk-On' and 'Risk-Off' regimes that govern the velocity of arbitrage capital flows. During Risk-On regimes, arbitrageurs prioritize trading opportunities over inventory-holding risk mitigation, adjusting asset prices to meet liquidity demands through temporary concessions. This behavior leads to an overcorrection of mispricings and a reduced half-life of spreads in response to liquidity shocks. In Risk-Off regimes, arbitrageurs prioritize inventory risk management and demand higher risk premiums, leading to undercorrection of prices and extended spread half-lives. In asymmetric markets, the faster flow of arbitrage capital in more liquid segments absorbs liquidity shocks disproportionately, inducing early co-movement in asset prices.

Heterogenous Transaction Costs and Asset Prices: A Dynamic Equilibrium Model

Abstract. I examine the impact of heterogeneous convex trading costs on asset price dynamics in an economy where two trader types—buyers and sellers—endogenously supply and demand based on their opposite liquidity needs. Symmetric cost structures neutralize the price impacts of buyers and sellers but influence trading volumes. Under asymmetric trading costs, traders exhibit different trading speeds and targets, and asset prices absorb their liquidity shocks asymmetrically. Low-cost traders (fast traders) become net suppliers of demand or supply risks, while high-cost traders (slow traders) exhibit delayed position realignment. Their asymmetric trading speeds generate a slow recovery of asset prices following liquidity shocks and subsequent price overshooting. This overshooting serves as a compensatory mechanism for slow traders to liquidate excessive inventories. Larger cost disparities amplify price volatility and enhance return predictability characterized by short-term reversal and longer-term momentum. High-cost traders rationally behave as trend-chasers to mitigate potentially large price impact costs.

Asset Price Dynamics under Trading Costs and Information Asymmetry

Work in Progress

Inefficient Risk Sharing in Credit Cycles: A Two-Sector General Equilibrium Model