Research

Abstract. I investigate asset price dynamics and market efficiency in a competitive economy where risk-averse arbitrageurs face price impact costs and gradually share hedgers' liquidity risks in segmented markets. The asset spread varies with the level of hedgers' liquidity risks and aggregate arbitrage capital. While the spread increases with hedgers' liquidity risks, its relationship with aggregate arbitrage inventory depends on the relative holding-to-trading costs of arbitrageurs and hedgers. This spread-inventory relationship identifies two distinct arbitrage regimes: ``Risk-On" and ``Risk-Off." In the Risk-On regime, where arbitrageurs with high-risk appetites incur lower holding-to-trading costs, the spread is overcorrected by aggressive arbitrage. In the Risk-Off regime, where arbitrageurs with low-risk appetites face higher holding-to-trading costs, the spread is undercorrected by passive arbitrage. Competitive arbitrage may exceed socially efficient speeds, as arbitrageurs prioritize short-term inventory risk minimization at the expense of market liquidity. A redistribution policy targeting inventory neutrality can incentivize long-term liquidity provision, reducing price gaps and improving market efficiency.

Abstract. I analyze asset price dynamics in a general equilibrium model with price impact costs and asymmetric information about asset supply shocks. An informed group with private asset supply risks demands liquidity, while an uninformed group provides liquidity by gradually learning the size of the counterparties' private supply risks. Without information asymmetry, supply shocks cause deviations of the asset price from its fundamental value, with slow recovery. When liquidity providers face higher trading costs than demanders, volume-based price adjustments lead to price overshooting and excess volatility in the price-to-fundamental spread beyond the aggregate supply risk. Under asymmetric information, the price response to supply shocks may weaken if uninformed liquidity providers face higher trading costs and have no current estimation error of private supply risks, while volatility in the price-to-fundamental spread generally increases.

Abstract. This paper studies capital misallocation and asset pricing in a two-sector economy with fixed aggregate capital, where firms facing convex adjustment costs gradually reallocate capital in response to productivity shocks. Sectoral capital adjusts toward a target allocation determined by the discounted expected difference in marginal products across sectors. Total factor productivity (TFP) evolves endogenously and responds to the alignment between sectoral productivity and the distribution of capital. Reallocation inertia induces a hump-shaped impulse response of TFP—an initial decline followed by overshooting relative to the frictionless benchmark. Expected returns reflect both aggregate and sector-specific productivity risks, with reallocation risk premia increasing in the degree of capital imbalance. The slow-moving capital effect generates short-term momentum and long-term reversal in asset returns.

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Abstract. I examine the role of futures contracts in a portfolio choice problem where an active investor faces trading costs when rebalancing between a bond and an illiquid equity with alpha. Futures contracts are introduced as a liquid alternative to the equity but involve basis risk and rollover costs. The optimal overlay strategy allows the investor to separate the equity portfolio's market-related performance from its alpha performance. The results show that the trading size and frequency of the equity position decrease when the basis risk and rollover costs of futures contracts are low. Furthermore, the optimal overlay strategy is state-dependent: in a high-alpha state, the investor increases the equity proportion even with low basis risk, while in a low-alpha state, the investor shifts towards increasing the overlay position.

Abstract. This paper examines the optimal allocation of effort between short-term and long-term tasks and the design of incentive-compatible contracts in a multitasking principal-agent framework. As the agent views tasks as strategic substitutes, task arbitrage arises. To manage this, the principal designs contracts that incentivize the agent to view tasks as complementary. If only short-term tasks are present, the contract addresses static task arbitrage, potentially resulting in more back-loaded and volatile compensation. If both task types coexist, the agent exploits persistent information rents from the long-term task, and the optimal contract exhibits dynamic complementarity to manage dynamic task arbitrage. Compensation adjusts according to the agent’s information rent and can be either front-loaded or back-loaded.