Search and Endogenous Concentration of Liquidity in Asset Markets

Dimitri Vayanos

No 647, Econometric Society 2004 North American Winter Meetings from Econometric Society

Abstract: In this paper, we develop a search-based model of asset trading. We assume that investors differ in their horizons, and can invest in two identical assets. The asset markets are partially segmented: investors can search in only one market, but can decide which one. We show that there exist a continuum of symmetric equilibria where investors are indifferent between the two markets, and a unique clientele equilibrium where short-horizon investors strictly prefer one market. This ``liquid" market has higher volume and prices, and lower search times for buyers and sellers. The clientele equilibrium generally dominates the symmetric ones, i.e., the concentration of liquidity is socially desirable. In some cases, however, the clientele equilibrium is dominated, and in these cases the entry of buyers in the liquid market is below the socially optimal level.

Keywords: search; liquidity premia; welfare (search for similar items in EconPapers)
JEL-codes: C78 G12 (search for similar items in EconPapers)
Date: 2004-08-11
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Citations: View citations in EconPapers (1)

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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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