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Economics Job Talk

Monday, February 13, 2023
4:00pm to 5:00pm
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Baxter Lecture Hall
Liquidity and Risk in OTC Markets: A Theory of Asset Pricing and Portfolio Flows
Mahyar Kargar, Assistant Professor of Finance, Gies College of Business, University of Illinois at Urbana-Champaign,

Abstract: We develop an asset-pricing model with heterogeneous investors, search frictions, and wealth effects. Trade is intermediated by risk-neutral dealers subject to capacity constraints. Risk- averse investors direct their search towards dealers based on price and execution speed. Portfolio asymmetry relative to target amplifies the risk premium, and portfolio dispersion leads to a decline in the risk-free rate and higher trading volume, bid-ask spreads, and trading delays. We propose a new solution method to characterize the equilibrium analytically. Model's quantitative implications for asset prices and liquidity conditions in response to a large adverse shock are consistent with the evidence from March 2020.

For more information, please contact Barbara Estrada by phone at 626-395-4083 or by email at [email protected].