Research

Abstract. I examine asset price dynamics and market efficiency in an equilibrium model where arbitrageurs with limited risk-bearing capacity face convex trading costs while exploiting price discrepancies across segmented markets. The model identifies two arbitrage paradigms: 'Risk-On' and 'Risk-Off.' Risk-On arbitrageurs, with higher risk-bearing capacity, place more aggressive weight on liquidity provision and bet against the inventory of other arbitrageurs, while Risk-Off arbitrageurs with lower capacity provide less liquidity and avoid betting against their peers. In a Risk-On economy, arbitrageurs overcorrect mispricings with a shorter half-life of spreads than in autarky, whereas in a Risk-Off economy, they undercorrect with a longer half-life. I show that a redistribution policy can enhance market welfare by increasing long-term liquidity provision and moderating the speed of arbitrage that may exceed the socially efficient level.

Abstract. I present a dynamic asset pricing model in inelastic markets, where heterogeneous traders face convex trading costs and information asymmetry regarding redistributive liquidity shocks. Under asymmetric trading costs and symmetric information, fast-moving traders competitively exert market power to increase the participation of their slow-moving counterparts. Redistributive shocks cause the asset price to deviate from its fundamental value and lead to a slow recovery with overshooting. Asymmetric trading costs result in excess volatility, short-term reversal, and longer-term momentum. Under information asymmetry, informed traders strategically trade against uninformed counterparts, creating latent fund flows. Asymmetric information can mitigate the price effects of trading costs but add price variability through additional latent fund flows. While amplifying volatility with low trading costs for the informed group, asymmetric information can dampen volatility when substantial costs constrain informed traders. Additionally, asymmetric information increases short-term reversal but reduces longer-term momentum.

Abstract. (soon)