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Heterogeneity in decentralized asset markets

Julien Hugonnier, Benjamin Lester () and Pierre-Olivier Weill ()
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Julien Hugonnier: Swiss Finance Institute

No 15-22, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We study a search and bargaining model of an asset market, where investors’ heterogeneous valuations for the asset are drawn from an arbitrary distribution. Our solution technique renders the analysis fully tractable and allows us to provide a full characterization of the equilibrium, in closed-form, both in and out of steady-state. We use this characterization for two purposes. First, we establish that the model can naturally account for a number of stylized facts that have been documented in empirical studies of over-the-counter asset markets. In particular, we show that heterogeneity among market participants implies that assets are reallocated through “intermediation chains,” ultimately producing a core-periphery trading network and non-trivial distributions of prices and trading times. Second, we show that the model generates a number of novel results that underscore the importance of heterogeneity in decentralized markets. We highlight two: First, heterogeneity magnifies the price impact of search frictions; and second, search frictions have larger effects on price levels than on price dispersion. Hence, quantifying the price discount or premium created by search frictions based on observed price dispersion can be misleading.

Keywords: Search frictions; Bargaining; Continuum of types; Price dispersion (search for similar items in EconPapers)
JEL-codes: G11 G12 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: 2015-05-01
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Related works:
Working Paper: Heterogeneity in Decentralized Asset Markets (2019) Downloads
Working Paper: Heterogeneity in Decentralized Asset Markets (2019)
Working Paper: Heterogeneity in decentralized asset markets (2016) Downloads
Working Paper: Heterogeneity in Decentralized Asset Markets (2014) Downloads
Working Paper: Heterogeneity in Decentralized Asset Markets (2014) Downloads
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