New Research Reveals Impact of Trading Frictions on Financial Markets
The article discusses how search frictions impact financial markets. The researchers created models to study liquidity provision and price dispersion during crises. They found that fast investors charge a speed premium and hold larger inventories. During turbulent times, price dispersion increases due to higher asset payoff volatility. Trading activity can either rise or fall depending on background risk volatility. This research has implications for trading regulations like the Volcker rule.