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The role of trading frictions in financial markets

Samuel Huber () and Jaehong Kim

Journal of Economic Dynamics and Control, 2019, vol. 99, issue C, 1-18

Abstract: We develop a dynamic general equilibrium model to analyze the role of trading frictions in over-the-counter markets. In our model, agents face idiosyncratic preference shocks and a financial market allows them to rebalance their portfolio composed of money and bonds in response to these shocks. We disentangle the effects of search and bargaining on welfare and study each one of them. We show that bargaining is generally welfare-improving, while search frictions are not. This is because search frictions do not only affect the demand for the respective assets, but also their allocation.

Keywords: Monetary theory; Over-the-counter markets; Search and bargaining (search for similar items in EconPapers)
JEL-codes: D47 D52 D62 E31 E44 E50 G11 G12 (search for similar items in EconPapers)
Date: 2019
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Working Paper: The role of trading frictions in financial markets (2017) Downloads
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