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