Search and endogenous concentration of liquidity in asset markets

Dimitri Vayanos and Tan Wang

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: liquidity; search; asset pricing (search for similar items in EconPapers)
JEL-codes: D80 G10 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2004-08
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http://eprints.lse.ac.uk/455/ Open access version. (application/pdf)

Related works:
Journal Article: Search and endogenous concentration of liquidity in asset markets (2007)
Working Paper: Search and Endogenous Concentration of Liquidity in Asset Markets (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:455

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