Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/43258 
Year of Publication: 
2010
Series/Report no.: 
CFS Working Paper No. 2010/14
Publisher: 
Goethe University Frankfurt, Center for Financial Studies (CFS), Frankfurt a. M.
Abstract: 
We study price pressures in stock prices-price deviations from fundamental value due to a risk-averse intermediary supplying liquidity to asynchronously arriving investors. Empirically, twelve years of daily New York Stock Exchange intermediary data reveal economically large price pressures. A $100,000 inventory shock causes an average price pressure of 0.28% with a half-life of 0.92 days. Price pressure causes average transitory volatility in daily stock returns of 0.49%. Price pressure effects are substantially larger with longer durations in smaller stocks. Theoretically, in a simple dynamic inventory model the 'representative' intermediary uses price pressure to control risk through inventory mean reversion. She trades off the revenue loss due to price pressure against the price risk associated with remaining in a nonzero inventory state. The model's closed-form solution identifies the intermediary's relative risk aversion and the distribution of investors' private values for trading from the observed time series patterns. These allow us to estimate the social costs-deviations from constrained Pareto efficiency-due to price pressure which average 0.35 basis points of the value traded.
Subjects: 
Liquidity
Inventory Risk
Intermediary
Volatility
JEL: 
G12
G14
D53
D61
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
729.63 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.