Fragmentation and stability of markets

Daniel Ladley (), Terje Lensberg, Jan Palczewski and Klaus Schenk-Hoppé

Journal of Economic Behavior & Organization, 2015, vol. 119, issue C, 466-481

Abstract: Trading skills are highly rewarded in practice but largely ignored in theoretical models of financial markets. This paper demonstrates the importance of skills by examining their interaction with market fragmentation and market stability. We consider a computational model where traders’ abilities to accurately price assets are endogenous. In contrast to models that do not consider skills, we find that centralising markets can lead to higher price volatility and less resilience to shocks because it increases the equilibrium proportion of unskilled traders.

Keywords: Skills; Market fragmentation; Volatility; Market resilience (search for similar items in EconPapers)
JEL-codes: D47 D83 G11 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:119:y:2015:i:c:p:466-481

DOI: 10.1016/j.jebo.2015.09.013

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