We model the interactions between the trading activities of a large investor, the stock price and the market liquidity. Our framework generalizes the model of Frey (2000), where liquidity is constant by introducing a stochastic liquidity factor. This innovation has two implications. First, we...

This paper investigates the interactions between stock price movements, the trading strategies of a large trader, and liquidity. Our framework generalizes the model of Frey by introducing a stochastic liquidity factor. We derive a formula for the feedback effect of the large investor's trading...