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Market quality and contagion in fragmented markets

Rohit Rahi () and Jean-Pierre Zigrand

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

Abstract: Financial market liquidity has become increasingly fragmented across multiple trading platforms. We propose an intuitive welfare-based market quality metric that can properly aggregate local market conditions across both securities and trading venues. Our analysis rests on a general equilibrium model with segmented markets. Arbitrageurs reap profits by effectively providing intermediation services (i.e. “liquidity"). Our market quality measure is equal to the additional consumption enjoyed by investors as a result of this intermediation, and can be represented by means of a number of observable proxies. The model is especially well-suited to study the contagion-like effects of liquidity shocks.

Keywords: Fragmented markets; intermediation; arbitrage; liquidity; contagion (search for similar items in EconPapers)
JEL-codes: D52 D53 G10 G20 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2013-09-27
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (8) Track citations by RSS feed

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