Date of Award

12-18-2024

Author's School

Graduate School of Arts and Sciences

Author's Department

Economics

Degree Name

Doctor of Philosophy (PhD)

Degree Type

Dissertation

Abstract

This dissertation explores the idea of slow-moving capital and its implications for asset price dynamics and market efficiency. In Chapter 1, I investigate asset price dynamics and market efficiency in a competitive economy where risk-averse arbitrageurs face price impact costs and gradually share hedgers' liquidity risks in segmented markets. The asset spread varies with the level of hedgers' liquidity risks and aggregate arbitrage capital. While the spread increases with hedgers' liquidity risks, its relationship with aggregate arbitrage inventory depends on the relative holding-to-trading costs of arbitrageurs and hedgers. This spread-inventory relationship identifies two distinct arbitrage regimes: “Risk-On” and “Risk-Off.” In the Risk-On regime, where arbitrageurs with high-risk appetites incur lower holding-to-trading costs, the spread is overcorrected by aggressive arbitrage. In the Risk-Off regime, where arbitrageurs with low-risk appetites face higher holding-to-trading costs, the spread is undercorrected by passive arbitrage. Competitive arbitrage may exceed socially efficient speeds, as arbitrageurs prioritize short-term inventory risk minimization at the expense of market liquidity. A redistribution policy targeting inventory neutrality can incentivize long-term liquidity provision, reducing price gaps and improving market efficiency. In Chapter 2, I analyze asset price dynamics in a general equilibrium model with price impact costs and asymmetric information about asset supply shocks. An informed group with private asset supply risks demands liquidity, while an uninformed group provides liquidity by gradually learning the size of the counterparties' private supply risks. Without information asymmetry, supply shocks cause deviations of the asset price from its fundamental value, with slow recovery. When liquidity providers face higher trading costs than demanders, volume-based price adjustments lead to price overshooting and excess volatility in the price-to-fundamental spread beyond the aggregate supply risk. Under asymmetric information, the price response to supply shocks may weaken if uninformed liquidity providers face higher trading costs and have no current estimation error of private supply risks, while volatility in the price-to-fundamental spread generally increases.

Language

English (en)

Chair and Committee

Nicolae Gârleanu

Available for download on Wednesday, December 16, 2026

Included in

Finance Commons

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