2018/07/22 by Peter Bank, Bank, Peter, Ibrahim Ekren +3 · 1 citation
Economics, Econometrics and Finance · #FOS: Economics and business #General Finance (q-fin.GN) #Portfolio Management (q-fin.PM) #Trading and Market Microstructure (q-fin.TR) #q-fin.GN #q-fin.PM #q-fin.TR
paper · pdf · doi:10.48550/arxiv.1807.08278
29 pages, 3 figures, forthcoming in 'Mathematical Finance'
arxiv created 2021/03/02 · arxiv updated 2021/03/03
We study a continuous-time version of the intermediation model of Grossman and Miller (1988). 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.