We study the ex-ante maximization of market efficiency , defined in terms of minimum deviation of market prices from fundamental values, from a centralized planner's perspective. Prices are pressured from exogenous trading actions of leverage targeting banks, which rebalance their portfolios in response to asset shocks. We develop an explicit expression for the matrix of asset holdings which minimizes market inefficiency , and characterize it in terms of two key sufficient statistics: the banks' systemic significances and the statistical moments of asset shocks  . Our analysis shows that higher homogeneity in banks' systemic significances requires banks' portfolio holdings to be further away from a full diversification strategy to reduce inefficiencies .
We study the ex-ante minimization of market inefficiency , defined in terms of minimum deviation of market prices from fundamental values, from a centralized planner's perspective. Prices are pressured from exogenous trading actions of leverage targeting banks, which rebalance their portfolios in response to asset shocks. We characterize market inefficiency in terms of two key drivers, the banks' systemic significance and the statistical moments of asset shocks , and develop an explicit expression for the matrix of asset holdings which minimizes such inefficiency . Our analysis shows that to reduce inefficiencies, portfolio holdings should deviate more from a full diversification strategy if there is little heterogeneity in banks' systemic significance .
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maximization of market efficiency
minimization of market inefficiency
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develop an explicit expression for the matrix of asset holdings which minimizes market inefficiency , and characterize it
characterize market inefficiency
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sufficient statistics:
drivers,
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significances
significance
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, and develop an explicit expression for the matrix of asset holdings which minimizes such inefficiency
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higher homogeneity in banks' systemic significances requires banks' portfolio holdings to be further away
to reduce inefficiencies, portfolio holdings should deviate more
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to reduce inefficiencies
if there is little heterogeneity in banks' systemic significance