Endogenous liquidity risk and dealer market structure

Robert Jarrow () and Siguang Li

The Quarterly Review of Economics and Finance, 2021, vol. 81, issue C, 449-453

Abstract: This paper derives a liquidity cost process in a non-cooperative cost competition game among market makers and discusses its implication for the structure of a dealer market. The main result shows that there does not exist an equilibrium supporting both multiple market makers earning strictly positive profits and a well-behaved liquidity cost process (i.e. strictly increasing and convex) as documented in the price impact literature. Bertrand price competition arises as an equilibrium phenomenon, which naturally leads to the dominance of a cost-efficient market maker in the dealer market.

Keywords: Endogenous liquidity risk; Bertrand price competition; Dealer market; Supply curve (search for similar items in EconPapers)
JEL-codes: C72 D53 L11 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:81:y:2021:i:c:p:449-453

DOI: 10.1016/j.qref.2020.10.025

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