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Price impact under heterogeneous beliefs and restricted participation

Anthropelos, Michail and Kardaras, Constantinos ORCID: 0000-0001-6903-4506 (2024) Price impact under heterogeneous beliefs and restricted participation. Journal of Economic Theory, 215. ISSN 0022-0531

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Identification Number: 10.1016/j.jet.2023.105774

Abstract

We consider a financial market in which traders potentially face restrictions in trading some of the available securities. Traders are heterogeneous with respect to their beliefs and risk profiles, and the market is assumed thin: traders strategically trade against their price impacts. We prove existence and uniqueness of a corresponding equilibrium, and provide an efficient algorithm to numerically obtain the equilibrium prices and allocations given market's inputs. We find that restrictions may increase the market's welfare if traders have different views regarding the covariance matrix of securities returns. The latter heterogeneity regarding covariance matrix disagreement is essential in modelling; for instance, when traders agree on the covariance matrix, restricting participation in some securities for some traders leaves equilibrium prices unaltered in the unrestricted securities, a certainly undesirable model effect.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-e...
Additional Information: © 2023 Elsevier Inc
Divisions: Statistics
Subjects: H Social Sciences > HB Economic Theory
Date Deposited: 14 Dec 2023 16:24
Last Modified: 01 Oct 2024 03:53
URI: http://eprints.lse.ac.uk/id/eprint/121058

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