Żurawski , Piotr Marcin
(2011)
Essays on market liquidity.
PhD thesis, London School of Economics and Political Science.
Abstract
In the first chapter of my Thesis I propose a model of front-running in noisy
market environment. I demonstrate that even if the front-runner/predator has no
initial knowledge about the position of a distressed trader he will be still able to
front-run his orders in a linear Bayesian-Nash equilibrium. This is possible
because initial orders of the distressed trader tend to reveal his initial position.
The contribution of this chapter is also in the analysis of long-term dynamics of
predatory trading under Gaussian uncertainty.
Second chapter treats about the dark-pools of liquidity which are highly popular
systems that allow participants to enter unpriced orders to buy or sell securities.
These orders are crossed at a specified time at a price derived from another
market. I present an equilibrium model of coexistence of dark-pools of liquidity
and the dealer market. Dealer market provides the immediate execution,
whereas the dark-pool of liquidity provides lower cost of trading. Risk-averse
agents in equilibrium optimally choose between safe dealer market and cheaper
dark-pool of liquidity.
In the third chapter I solve for a partial-equilibrium optimal consumption and
investment problem, when one of the investment assets is traded infrequently.
Opportunity to trade the "illiquid asset" arises upon the occurrence of a Poisson
event. Only when such event occurs a trader is able to change (increase or
decrease) her position in the illiquid asset. The investor can consume
continuously from the bank account. After deriving HJB equation, I analyze in
details the implications of illiquidity on the optimal level of consumption,
allocation and welfare. The optimal policy is solved using algorithm from
aeronautics.
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