VGSF - WU Vienna - LC

Albert Menkveld, VU University Amsterdam

Campus WU D3.0.225 11:00 - 12:30

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Al­bert Men­k­veld from VU Uni­versity Am­s­ter­dam to present his re­search pa­per.
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Large Orders in Small Mar­kets: On Op­timal Ex­e­cu­tion with En­do­gen­ous Li­quid­ity Sup­ply

We solve a Stack­el­berg game where a large un­in­formed seller ex­ecutes op­tim­ally, fully cog­niz­ant of the re­sponse of Cournot-­com­pet­it­ive mar­ket makers. The game there­fore en­do­gen­izes both de­mand and sup­ply of li­quid­ity. The closed-­form solu­tion yields several in­sights. First, stealth trad­ing is both privately and so­cially costly be­cause mar­ket makers in­cur ad­di­tional cost not know­ing when ex­e­cu­tion ends. Second, the pres­ence of a large seller does not un­am­bigu­ously be­ne­fit other par­ti­cipants. Mar­ket makers be­ne­fit only if there is enough risk-­ab­sorp­tion ca­pa­city or if the ex­e­cu­tion period is short. Other in­vestors be­ne­fit only when the seller sells at high enough in­tens­ity.

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