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Search and endogenous concentration of liquidity in asset markets

Author

Listed:
  • Vayanos, Dimitri
  • Wang, Tan
Abstract
We develop a search-based model of asset trading, in which investors of different horizons can invest in two identical assets. The asset markets are partially segmented: buyers can search for only one asset, but can decide which one. We show that there exists a "clientele" equilibrium where one market has more buyers and sellers, lower search times, higher trading volume, higher prices, and short-horizon investors. This equilibrium dominates the ones where the two markets are identical, implying that the concentration of liquidity in one asset is socially desirable. At the same time, too many buyers decide to search for the liquid asset.

Suggested Citation

  • Vayanos, Dimitri & Wang, Tan, 2004. "Search and endogenous concentration of liquidity in asset markets," LSE Research Online Documents on Economics 455, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:455
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    References listed on IDEAS

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    More about this item

    Keywords

    liquidity; search; asset pricing;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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