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The Equilibrium Price Path. 

The Equilibrium Price Path. 

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During financial disruptions, marketmakers provide liquidity by absorbing external selling pressure. They buy when the pressure is large, accumulate inventories, and sell when the pressure alleviates. This paper studies optimal dynamic liquidity provision in a theoretical market setting with large and temporary selling pressure, and order-execution...

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Context 1
... B.2 derives closed-form solutions for the equilibrium price path p(t) and the reser- vation values ∆V (t) and ∆V h (t). The price path, shown in the lower panel of Figure 4, jumps down at time zero, then increases, and eventually stabilizes at its steady-state level. 17 The price path reflects the three phases of the socially optimal allocation: before the first breaking time t * 1 , sellers are indifferent between selling or not selling, meaning that p(t) = ∆V (t) = λ (t). ...
Context 2
... A simple way to construct the initial price jump is to start the economy in steady state at t = 0 and assume that agents anticipate a crash at some Poisson arrival time with intensity κ. One can show that the results of this paper would apply, provided that either κ is small enough or t * 1 > 0. For Figure 4, it is assumed that κ = 0. ...