Abstract
We develop an equilibrium model of strategic trading under financial constraints. Investors have access to a fundamentally riskless arbitrage opportunity, but may be forced to re-sell if their capital does not fully cover their losses. Investors internalize both their price impact and the e⁄ffect of price movements on the constraints of all market participants, giving rise to a strategic motive for the less exposed investors to induce re-sales of more exposed ones. Ex ante, the presence of predatory risk leads to lower investment by all traders. We show the implications of strategic trading on price dynamics, returns characteristics, and leverage cross-section and dynamics.
| Original language | English |
|---|---|
| Publication date | 2020 |
| Number of pages | 44 |
| Publication status | Published - 2020 |
| Event | The 80th Annual Meeting of American Finance Association. AFA 2020 - San Diego, United States Duration: 3 Jan 2020 → 5 Jan 2020 Conference number: 80 https://afajof.org/annual-meeting/ |
Conference
| Conference | The 80th Annual Meeting of American Finance Association. AFA 2020 |
|---|---|
| Number | 80 |
| Country | United States |
| City | San Diego |
| Period | 03/01/2020 → 05/01/2020 |
| Internet address |
Keywords
- Limits to arbitrage
- Liquidity
- Wealth e⁄ffects
- Strategic trading
- Endogenous risk