Convergence trading with wealth effects: an amplification mechanism in financial markets

Abstract

I study convergence traders with logarithmic utility in a continuous-time equilibrium model. In general, convergence traders reduce asset price volatility and provide liquidity by taking risky positions against noise trading. However, when an unfavorable shock causes them to suffer capital losses, thus eroding their risk-bearing capacity, they liquidate… (More)

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@inproceedings{Xiong2001ConvergenceTW, title={Convergence trading with wealth effects: an amplification mechanism in financial markets}, author={Wei Xiong}, year={2001} }