Endogenous Inverse Demand Functions

Abstract

Endogenous Inverse Demand Functions Buying or selling assets in a financial market impacts the prices upward or downward. Quantifying these price impacts is fundamental to many problems within finance (e.g., optimal liquidation and systemic risk). In “Endogenous Inverse Demand Functions,” Bichuch and Feinstein construct an equilibrium risk sharing problem that results in an endogenous inverse demand function. This is taken in contrast to the often assumed exogenous linear or exponential forms for the inverse demand functions. The authors determine sufficient joint properties for the financial market and assets to replicate these common exogenous forms. The properties of the general endogenous inverse demand functions, found via the equilibrium risk sharing problem, are investigated; the authors deduce that price cross-impacts, which are often assumed to be zero, naturally arise in this equilibrium setting.