Heterogeneous Beliefs in Over-The-Counter Markets

Marc de Kamps, Daniel Ladley () and Aistis Simaitis

No 13/03, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: The behavior and stability of over-the-counter markets is of central concern to regulators. Little is known, however, about how the structure of these markets determine their properties. In this paper we consider an over-the-counter market populated by boundedly rational heterogeneous traders in which the structure is represented by a network. Stability is found to decrease as the market becomes less well connected, however, the configuration of connections has a significant effect. The presence of hubs, such as those found in scale free networks increases stability and decreases volatility whilst small-world links have the opposite effect. Volatility in the fundamental value increases market volatility, however, volatility in the riskless asset returns has an ambiguous effect.

Keywords: Over-the-Counter; Boundedly Rationality; Stability; Network; Heterogeneous Agent Model (search for similar items in EconPapers)
JEL-codes: C63 G10 (search for similar items in EconPapers)
Date: 2012-08, Revised 2013-09
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Journal Article: Heterogeneous beliefs in over-the-counter markets (2014)
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