Granularity in Asset Markets

Abstract

We develop a tractable model of inelastic markets with heterogeneous, strategic investors who internalize their price impact. Investor granularity generates endogenous “granular wedges”—such as divergences between size- and equal-weighted holdings—that govern equilibrium outcomes. The model overturns classical predictions: non-competitive markets can be more liquid than competitive ones, and prices depend on the cross-sectional distribution of holdings. Moreover, capital flows toward risk-averse investors can paradoxically reduce aggregate risk aversion, explaining why safe-asset prices may decline during flight-to-safety episodes.

BibTeX

@article{GlebkinMalamudTeguiaForthcomingGranularity,
  author = {Glebkin, Sergei and Malamud, Semyon and Teguia, Alberto},
  title = {Granularity in Asset Markets},
  journal = {Journal of Finance},
  year = {forthcoming},
  url = {https://sglebkin.com/GAM.pdf}
}