Pricing and Liquidity in Decentralized Asset Markets

Semih Üslü

No 128, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: I develop a search-and-bargaining model of liquidity provision in over-the-counter markets where investors differ in their search intensities. A distinguishing characteristic of my model is its tractability: it allows for heterogeneity, unrestricted asset positions, and fully decentralized trade. I find that investors with higher search intensities (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold larger and more volatile inventories. I also calibrate the model, demonstrate that it produces realistic quantitative outcomes, and use it to study the effect of trading frictions on the supply and price of liquidity. The results have policy implications concerning the Volcker rule.

Date: 2016
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Related works:
Journal Article: Pricing and Liquidity in Decentralized Asset Markets (2019)
Working Paper: Pricing and Liquidity in Decentralized Asset Markets (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:128

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