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Strategic Fragmented Markets

Ana Babus and Cecilia Parlatore

No 11591, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the determinants of asset market fragmentation. We develop a model of market formation in which investors with heterogeneous valuations for an asset trade strategically. When choosing a dealer with whom to trade, investors trade off the lower price impact and the steeper competition for the dealer's liquidity offered by a larger market. When the correlation among investor valuations is high, the increase in competition dominates the decrease in price impact and investors prefer to trade in a smaller market, which makes market fragmentation an equilibrium outcome. Fragmented market structures can Pareto dominate centralized ones and can exhibit higher trading volumes.

Keywords: Market fragmentation; Interdealer trading; Demand schedule equilibrium (search for similar items in EconPapers)
JEL-codes: D43 D47 G12 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-mic and nep-mst
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Journal Article: Strategic fragmented markets (2022) Downloads
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Working Paper: Strategic Fragmented Markets (2016) Downloads
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