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Introduction

This course gives an introduction to models for understanding the importance of frictions in real-world financial markets. By frictions we mean deviations from the most basic set of assumptions underlying a competitive equilibrium. The first part covers the field of Market Microstructure, focusing on market institutions, asymmetric information and liquidity provision. The second part discuss several important applications where addressing frictions has improved our understanding of functioning of financial markets. Both theoretical and empirical approaches will be discussed.

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Course content

Market Microstructure (8 hours):

• The frictionless benchmark
• Information asymmetries
• Liquidity provision
• Empirical approaches

Frictions: Some applications (8 hours):

• Market liquidity and funding liquidity risk
• Proxies for “the” risk-free interest rate
• Limits of arbitrage (theory)
• Limits of arbitrage (empirics)