Liquidity Risk and the Dynamics of Arbitrage Capital

• 成果类型: Article
• 署名作者: Kondor, Peter; Vayanos, Dimitri
• 署名单位: University of London; London School Economics & Political Science; Centre for Economic Policy Research - UK; National Bureau of Economic Research
• 刊物名称: JOURNAL OF FINANCE
• ISSN/ISSBN: 0022-1082
• DOI: 10.1111/jofi.12757
• 发表日期: 2019
• 页码: 1139-1173
• 关键词: cross-section; equilibrium; returns; prices

摘要

We develop a continuous-time model of liquidity provision in which hedgers can trade multiple risky assets with arbitrageurs. Arbitrageurs have constant relative risk-aversion (CRRA) utility, while hedgers' asset demand is independent of wealth. An increase in hedgers' risk aversion can make arbitrageurs endogenously more risk-averse. Because arbitrageurs generate endogenous risk, an increase in their wealth or a reduction in their CRRA coefficient can raise risk premia despite Sharpe ratios declining. Arbitrageur wealth is a priced risk factor because assets held by arbitrageurs offer high expected returns but suffer the most when wealth drops. Aggregate illiquidity, which declines in wealth, captures that factor.