Economics Job Talk

Abstract: We develop an asset-pricing model with heterogeneous investors, search frictions, and wealth effects. Trade is intermediated by risk-neutral dealers subject to capacity constraints. Risk- averse investors direct their search towards dealers based on price and execution speed. Portfolio asymmetry relative to target amplifies the risk premium, and portfolio dispersion leads to a decline in the risk-free rate and higher trading volume, bid-ask spreads, and trading delays. We propose a new solution method to characterize the equilibrium analytically. Model's quantitative implications for asset prices and liquidity conditions in response to a large adverse shock are consistent with the evidence from March 2020.