Download or read book Asset Prices and Wealth Dynamics in a Financial Market with Endogenous Liquidation Risk written by Pietro Dindo and published by . This book was released on 2018 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: Within a financial market where a risk-free bond and a long-lived risky asset are exchanged by investors with heterogeneous trading rules, we assume that the investors most exposed to the risky asset are subject to joint liquidation needs. The latter encompass a risk whenever the market impact of traders subject to them is large enough, due to a fire-sale phenomenon. Our aim is to provide conditions for the transformation of liquidation needs into liquidation risk, and to characterize the resulting asset price dynamics. We find that when the average position of traders subject to liquidation needs is lower than the position of the other traders, the former vanish and asset prices are driven solely by the dividend process. Whether liquidation risk becomes systemic or its impact is mitigated by the position of other traders, depends on the relative wealth dynamics. We provide conditions on agents positions under which the liquidation risk is always systemic because the aggressive traders dominate, as well as conditions under which the size of the liquidation risk is endogenously determined because all traders survive and the relative wealth dynamics is a mean reverting process.
Download or read book Asset Price and Wealth Dynamics with Heterogeneous Expectations written by Florian Heitger and published by . This book was released on 2010 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Based on a classical financial market model different model variants known from the literature are discussed and analyzed, each focussing on modeling financial markets as a nonlinear dynamic system by introducing the formation of (heterogeneous) beliefs about future asset prices into the model framework. Furthermore, a market model under a market maker scenario is proposed which brings these types of financial market models to a more consistent and more realistic model structure. The proposed market model explicitly takes into account the risky-asset supply side. This extension in the model structure allows to model the risk premium demanded by the market participants for taking market risk, which appears to be endogenously driven by the market over time. The resulting dynamics of asset price and agents' wealth is analyzed within a chartist-fundamentalist framework. Within this model framework it becomes possible to characterize the market equilibria and the other kinds of asymptotic behavior in terms of the long-run evolution of wealth proportions and risky-asset returns. Moreover it is shown to which extent those heterogeneous expectations in the agent-based market model can explain observed fluctuations in real financial markets and lead to the emergence of complicated dynamics of growing asset price paths.
Download or read book Liquidity and Asset Prices written by Yakov Amihud and published by Now Publishers Inc. This book was released on 2006 with total page 109 pages. Available in PDF, EPUB and Kindle. Book excerpt: Liquidity and Asset Prices reviews the literature that studies the relationship between liquidity and asset prices. The authors review the theoretical literature that predicts how liquidity affects a security's required return and discuss the empirical connection between the two. Liquidity and Asset Prices surveys the theory of liquidity-based asset pricing followed by the empirical evidence. The theory section proceeds from basic models with exogenous holding periods to those that incorporate additional elements of risk and endogenous holding periods. The empirical section reviews the evidence on the liquidity premium for stocks, bonds, and other financial assets.
Download or read book Essays on Monetary Economics written by Chien-Chiang Wang and published by . This book was released on 2017 with total page 144 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the first chapter, I propose a liquidity theory of yield curves to analyze the impact of quantitative easing, especially its influence on the yield curve and the inflation rate at the zero lower bound. In the model, a term premium originates from the endogenous difference in liquidity between securities of varying maturities, and the difference is generated by financial market frictions. Financial market frictions cause liquidation risk and reinvestment risk for holding assets, and households with different characteristics make different assessments of the two risks. Accordingly, different households require different term premia and endogenously participate in markets for different maturities. When the short-term interest rate reaches the zero lower bound, long-term interest rates may not reach the reservation interest rates for long-term bond buyers. Thus, central banks' purchases of long-maturity securities can effectively decrease long-term interest rates and the term premium. Moreover, central banks' long-term security purchases decrease inflation at the zero lower bound. These two effects together result in a distinct policy implication: quantitative easing shifts down the real yield curve at the long-maturity end but shifts it up at the short-maturity end if the households are sufficiently diverse in the term premia they require.In the second chapter, I develop a dynamic general equilibrium model to investigate the interaction between asset market liquidity and repo haircuts. In the economy, investors finance their asset purchases through secured borrowing, and the asset is pledged as collateral. Investors' debt roll over before their assets mature. The maturity of assets is random, and default occurs when the borrowing limit is reached. The search and matching friction in the financial market results in delays in collateral liquidation, and therefore causes a gap between the asset price and the borrowing capacity, which is the haircut. The model reveals an endogenous feedback loop between asset market liquidity and repo haircuts. On the one hand, asset market liquidity determines the easiness of asset liquidation, which in turn determines the haircuts. On the other hand, haircuts influence entrepreneurs' borrowing limits and leverage, which affect the probability of default and therefore influence the asset market liquidity. When an unanticipated shock on market liquidity occurs, the increase in haircuts decreases households' borrowing limit and triggers simultaneous defaults. The liquidation of asset further decreases the liquidity of the asset market, and the impact is exacerbated by the endogenous feedback loop.The third and final chapter studies the macroeconomic consequences of central banks' risky asset purchases. By purchasing risky assets, central banks remove them from the financial market and inject money, which is a less risky and more liquid asset. Whereas, the removed risky assets stay in central banks' balance sheets and increase the instability of their budgets, and thus, create inflation risk. The key friction in the model is the market segmentation between the money transaction sector and financial transaction sector. The households in money transaction sector can only use cash as a medium of exchange, but households in the financial transaction sector can use all forms of assets and asset backed securities to facilitate transaction. The central banks' purchases of risky assets overcome the market segmentation and can improve social welfare through risk sharing between financial sector transactions and money transactions. However, because the risk in money transactions cannot be efficiently allocated between risk-averse and risk-neutral traders by financial intermediaries, central banks should make the holding of cash less risky, and it is not optimal for central banks to purchase all risky assets and completely insure the risk in the financial transactions with money transactions.
Download or read book The Liquidity Theory of Asset Prices written by Gordon Pepper and published by John Wiley & Sons. This book was released on 2006-03-30 with total page 190 pages. Available in PDF, EPUB and Kindle. Book excerpt: Professional investors are bombarded on a day to day basis with assertions about the role liquidity is playing and will play in determining prices in the financial markets. Few, if any, of the providers or recipients of such advice can truly claim to understand the well–springs of such liquidity and the transmission mechanisms through which it impacts asset prices. This groundbreaking new book explores the belief that at the core of liquidity there is a force which exerts individuals to effect a financial transaction when they would not otherwise do so. Understanding this force of compulsion is a key to understanding a financial market when it appears to be behaving irrationally. This book will enable new and seasoned investors to develop an understanding of the factors, so that costly mistakes can be avoided without the lesson of experience.
Download or read book Asset Price and Wealth Dynamics in a Financial Market with Heterogeneous Agents written by Carl Chiarella and published by . This book was released on 2004 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Stock Market Liquidity written by François-Serge Lhabitant and published by John Wiley & Sons. This book was released on 2008-01-09 with total page 502 pages. Available in PDF, EPUB and Kindle. Book excerpt: Brings together today's best financial minds across the world to discuss the issue of liquidity in today's markets. It is often proxied by trade-based measures (such as trading volume, frequency of trading, dollar value of shares trade, etc), order based measures and price impact measures.
Download or read book Asset Pricing Under Asymmetric Information written by Markus Konrad Brunnermeier and published by Oxford University Press, USA. This book was released on 2001 with total page 261 pages. Available in PDF, EPUB and Kindle. Book excerpt: The role of information is central to the academic debate on finance. This book provides a detailed, current survey of theoretical research into the effect on stock prices of the distribution of information, comparing and contrasting major models. It examines theoretical models that explain bubbles, technical analysis, and herding behavior. It also provides rational explanations for stock market crashes. Analyzing the implications of asymmetries in information is crucial in this area. This book provides a useful survey for graduate students.
Download or read book Asset Pricing Real Estate and Public Finance over the Crisis written by A. Carretta and published by Springer. This book was released on 2013-02-03 with total page 314 pages. Available in PDF, EPUB and Kindle. Book excerpt: The current financial crisis started from the US real estate market and after, though the increase of risk premium requested by investors and due to the lack of liquidity of all financial markets, it became a world financial crisis. A detailed analysis during the crisis focuses attention on asset management, the real estate and public sector.
Download or read book Endogenous Market Power and Asset Pricing in Thin Financial Markets written by Marek Weretka and published by . This book was released on 2006 with total page 346 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Market Liquidity written by Yakov Amihud and published by Cambridge University Press. This book was released on 2012-11-12 with total page 293 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book presents the theory and evidence on the effect of market liquidity and liquidity risk on asset prices and on overall securities market performance. Illiquidity means incurring a high transaction cost, which includes a large price impact when trading and facing a long time to unload a large position. Liquidity risk is higher if a security becomes more illiquid when it needs to be traded in the future, which will raise trading cost. The book shows that higher illiquidity and greater liquidity risk reduce securities prices and raise the expected return that investors require as compensation. Aggregate market liquidity is linked to funding liquidity, which affects the provision of liquidity services. When these become constrained, there is a liquidity crisis which leads to downward price and liquidity spiral. Overall, the volume demonstrates the important role of liquidity in asset pricing.
Download or read book The World Scientific Handbook of Futures Markets written by Anastasios G. E. T. Al MALLIARIS and published by World Scientific. This book was released on 2015-08-06 with total page 844 pages. Available in PDF, EPUB and Kindle. Book excerpt: "The World Scientific Handbook of Futures Markets serves as a definitive source for comprehensive and accessible information in futures markets. The emphasis is on the unique characteristics of futures markets that make them worthy of a special volume. In our judgment, futures markets are currently undergoing remarkable changes as trading is shifting from open outcry to electronic and as the traditional functions of hedging and speculation are extended to include futures as an alternative investment vehicle in traditional portfolios. The unique feature of this volume is the selection of five classic papers that lay the foundations of the futures markets and the invitation to the leading academics who do work in the area to write critical surveys in a dozen important topics."--$cProvided by publisher.
Download or read book Asset Prices and Aggregate Demand in a Covid 19 Shock written by Ricardo J. Caballero and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we: (i) provide a model of the endogenous risk intolerance and severe aggregate demand contractions following a large real (non-financial) shock; and (ii) demonstrate the effectiveness of Large Scale Asset Purchases (LSAPs) in addressing these contractions. The key mechanism stems from heterogeneous risk tolerance: as a recessionary shock hits the economy and brings down asset prices, risk-tolerant agents' wealth share declines and their leverage rises endogenously. This reduces the market's risk tolerance and generates downward pressure on asset prices and aggregate demand. When monetary policy is unconstrained, it can offset the decline in risk tolerance with an interest rate cut that boosts the market's Sharpe ratio. However, if the interest rate policy is constrained, new contractionary feedbacks arise: recessionary shocks lead to further asset price and output drops, which feed the risk-off episode and trigger a downward loop. In this context, LSAPs improve asset prices and aggregate demand by transferring risk to the government's balance sheet, which reduces the market's required Sharpe ratio. Optimal LSAPs are larger when the (consolidated) government has greater future fiscal capacity and the downward spiral is more severe. In an extension, we show how corporate debt overhang problems strengthen our mechanisms. The Covid-19 shock and the large response by all the major central banks provide a vivid illustration of the environment we seek to capture.
Download or read book Differences of Opinion Endogenous Liquidity and Asset Prices written by Emilio Osambela and published by . This book was released on 2016 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: This article studies how investors' differences of opinion affect liquidity and asset prices. We construct a dynamic general-equilibrium economy in which one population of excessively optimistic investors is subject to endogenous funding constraints that prevent default due to ex-ante limited commitment. When the funding constraint binds, optimists use their savings to increase their consumption share, in order to deter default. This higher consumption share lets them place speculative trades in the market place, increasing market liquidity. Because they generally lose on these trades, they become prone to default and the likelihood of funding constraints binding increases. We show that this joint feedback between funding illiquidity, disagreement and market liquidity is consistent with several empirically documented features of liquidity and financial asset prices.
Download or read book Dynamic Wealth Redistribution Trade and Asset Pricing written by Simon Benninga and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We relate wealth redistribution, asset pricing, and trade in financial assets by introducing heterogeneous agents into a Lucas tree-model. Heterogeneity of agents causes trade in financial assets and dynamic wealth redistribution. When consumers have time-separable, constant elasticity utilities with constant time-discount factors, the price- representative consumer has declining temporal relative risk aversion and intertemporal discount factors. Resulting asset prices quot;over-reactquot;: Adverse aggregate consumption shocks cause wealth redistribution towards more risk averse consumers, reinforcing the adverse market value effect. Interest rates, risk premia, return volatility, and trade volume exhibit time-variance.
Download or read book Financial Market Liquidity Asset Pricing and Financial Crises written by Maria Teresa Cândido and published by . This book was released on 1998 with total page 326 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Asset Price Dynamics with Value at risk Constrained Traders written by Jon Danielsson and published by . This book was released on 2001 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt:
