A Competitive Search Theory of Asset Pricing

We develop an asset-pricing model with heterogeneous investors and search frictions. The model nests standard asset pricing and competitive search models as special cases. Trade is intermediated by risk-neutral dealers subject to capacity constraints. Risk-averse investors can direct their search towards dealers based on price and execution speed. Order flows affect the risk premium, volatility, and equilibrium interest rate. Large negative shocks lead to portfolio reallocations and increased trading volume, bid-ask spreads, and trading delays. Simultaneously, the model generates increased risk premium and volatility and a reduction in interest rates, consistent with asset-pricing and trading behavior during the COVID-19 crisis.