Colloquium
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).
