Working Paper Abstract
Horizon Sorting: Investor Capacity and the Shape of Price-pressure Correction
Abstract
This paper develops a rational-expectations model of horizon sorting in asset markets. A single asset is exposed to flow-pressure shocks with different persistence. Investor classes differ in trading frictions, risk penalties, and shared capacity. Market clearing makes correction paths depend not only on aggregate demand elasticity but also on which investor class absorbs which persistence mode.
Shared class capacity turns dynamic trading-friction nesting into horizon sorting. Fast capital allocates relatively more capacity to fast-decaying shocks unless slow capital’s risk-bearing advantage is sufficiently large. Common internal redistribution modes then shape how inventory migrates across investor classes after a shock. Stylized numerical exercises illustrate inventory migration, normalized sorting strength, and restrictions on transient-flow recovery. The model predicts correction-path shape rather than only a scalar price-impact coefficient. The contribution is to connect flow persistence, investor capacity, and heterogeneous trading frictions in a framework that can distinguish fast-pressure reversal from slower capacity absorption.
Keywords: horizon sorting, investor capacity, price pressure, demand elasticity, slow-moving capital, asset pricing