Working Papers

Transaction Costs and Slow-Moving Arbitrage  (Job Market Paper)

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. 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.

A Dynamic Asset Pricing Model in Inelastic Markets

Abstract.   I present a dynamic asset pricing model in inelastic markets, where asset prices are impacted by fund flows among traders facing asymmetric convex trading costs and information asymmetry. Liquidity shocks redistribute asset demands across traders. Only informed traders have complete knowledge about liquidity shock levels. Without informational frictions, fast-moving traders set the target level for aggregate capital, while slow-moving traders contribute to its accumulation. Liquidity shocks cause large displacement in asset price and its subsequent slow recovery with overshooting, resulting in excess volatility. Under information asymmetry, informed traders generate additional latent fund flows and shift capital dynamics. Asymmetric information can mitigate the price effects of trading costs and alter price volatility. While typically increasing volatility, asymmetric information can reduce volatility when substantial trading costs constrain informed traders.

Work in Progress

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

Dynamic Futures Overlays

Optimal Horizon and Dynamic Compensation: Task Arbitrage and Intertemporal Incentives