4:00 p.m., Monday (March 3rd)

Math 203

Umut Cetin
Cornell University

Liquidity Risk and Arbitrage Pricing Theory

Classical theories of financial markets assume an infinitely liquid market and that all traders are price takers. This theory is a good approximation for highly liquid stocks, although even there it does not apply well for large traders, or for modeling transaction costs. We propose a new model that takes into account illiquidities, while extending the classical model. In essence, we relax the standard assumption of a competitive market, where each trader can either buy or sell unlimited quantities of a stock at the market price. Our approach hypothesizes a stochastic supply curve for a security's price as a function of trade size. This leads to some interesting mathematical issues, as well as natural restrictions on hedging strategies.

Refreshments will be served at 3:45 p.m. in the Faculty Lounge, Math Annex (Room 1115).

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