Pricing and Liquidity in Decentralized Asset Markets

MPRA Paper from University Library of Munich, Germany

Abstract: I develop a search-and-bargaining model of liquidity provision in over-the-counter markets where investors differ in their search intensities. A distinguishing characteristic of my model is its tractability: it allows for heterogeneity, unrestricted asset positions, and fully decentralized trade. I find that investors with higher search intensities (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold larger and more volatile inventories. Then, I use the model to study the effect of trading frictions on the supply and price of liquidity. The results have policy implications concerning the Volcker rule.

Keywords: Search frictions; Bargaining; Price dispersion; Financial intermediation (search for similar items in EconPapers)
JEL-codes: D53 D61 D83 G1 G11 G12 G21 (search for similar items in EconPapers)
Date: 2015-11-02, Revised 2016-09-21
New Economics Papers: this item is included in nep-dge
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https://mpra.ub.uni-muenchen.de/73901/1/MPRA_paper_73901.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/86298/1/MPRA_paper_86298.pdf revised version (application/pdf)

Related works:
Journal Article: Pricing and Liquidity in Decentralized Asset Markets (2019)
Working Paper: Pricing and Liquidity in Decentralized Asset Markets (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:73901

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