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Probability and Computational Finance Seminar
Agostino Capponi
Columbia University
Title: The term structure of liquidity: a liquidation game approach

Abstract: We analyze a dynamic liquidation game where both liquidity demand and supply are endogenous. A large uninformed investor strategically liquidates a position, fully cognizant of the optimal response of competitive market makers. The Stackelberg game solution shows that, if the investor reveals the duration of the trade to the intermediation sector, then he chooses to sell at higher intensity when he has less time to trade. This enables market makers to predict when execution ends, which helps them provide liquidity and thus reduces the liquidity premium they charge. The model explains several empirical facts: order duration and participation rate correlate negatively, and price pressure subsides before execution ends.

(Joint work with Hongzhong Zhang and Albert Menkveld)

Date: Monday, February 26, 2018
Time: 4:30 pm
Location: Wean Hall 8220
Submitted by:  Johannes Muhle-Karbe