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Elisa Luciano (Collegio Carlo Alberto & Università di Torino)

14 May 2012 @ 12:45

 

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Date:
14 May 2012
Time:
12:45
Event Category:

“Equilibrium price of immediacy and infrequent trade”

abstract

The paper studies the equilibrium value of bid-ask spreads and time-to-trade in a continuous-time, intermediated financial market. The endogenous spreads are the price at which brokers are willing to offer immediacy. In case intermediaries pay trading costs, it includes them too. We determine equilibrium trading policies, returns and liquidity premium. Both intervention barriers and intervention times are endogenous. The paper predicts spreads and times between successive trades increasing withthe difference in agents’ risk attitudes. The impact is one order of magnitude bigger. Bid-ask prices and trading barriers react asymetrically to an increase in the difference of risk aversions. They are symmetric in trading costs. We show that competition among brokers does not drive the spread to zero unless investors are risk-neutral.