Connecting Disconnected Financial Markets?

Milena Wittwer

American Economic Journal: Microeconomics, 2021, vol. 13, issue 1, 252-82

Abstract: In most financial markets, securities are traded in isolation. Such a disconnected market design can be inefficient if agents trade more than one security. I assess welfare effects of connecting markets by allowing orders for one security to depend on prices of other securities. I show that everyone trades identical amounts under both market structures if and only if the clearing prices are perfectly correlated or all are price-takers. Prices in disconnected markets might allow strategic traders to extract higher rents from nonstrategic traders. In expectation, connected markets generate higher welfare, but all markets become efficient as they grow large.

JEL-codes: D44 D47 G10 H82 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (6)

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DOI: 10.1257/mic.20180314

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