Peter Bossaerts from CalTech (California Institute of Technology) is giving a VGSF research seminar on "EQUILIBRATION UNDER COMPETITION IN SMALLS: THEORY AND EXPERIMENTAL EVIDENCE" on FRIDAY, Dec. 1st, from 15:30 to 17:00 at the WU Wien (Seminarraum D204, UZA 4, Nordbergstrasse 15, 1090 Wien, see http://www.wu-wien.ac.at/portal/ueber_wu/standorte/lageplan4 for a detailed plan). Please find the paper's abstract below. Peter is going to be in Vienna on Monday and Tuesday (Dec. 4th and 5th). Please contact Michael Halling if you would like to talk to Peter. Best, Michael Halling Abstract Many real-world markets are competitive only in smalls, taken to mean that price taking applies only to small orders. Starting from this observation, a theory of equilibration is derived where orders are optimal merely in a local sense. Prices are assumed to adjust in the direction of the order imbalance. In the context of financial markets populated with mean-variance optimizing agents, the theory predicts that a security's price will correlate with excess demands in other securities, and the sign of this correlation is the same as that of the covariance of the final payoffs. In the short run, prices tend to a local equilibrium where the risk-aversion weighted endowment portfolio (RAWE) is mean-variance optimal. Relative to the market portfolio, RAWE overweighs securities that are held disproportionally by more risk averse agents; RAWE puts less weight on securities that are held primarily by more risk tolerant agents. Throughout equilibration, portfolio separation is violated generically, and violations are more extreme when payoff covariances are positive. For a variety of patterns of initial allocations (including identical initial holdings), the equity premium is larger at the outset than at (CAPM) equilibrium. All these implications are confirmed in experiments.