The role of trading frictions in financial markets

Samuel Huber (samuel_h@gmx.ch) and Jaehong Kim

No 211, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: We develop a dynamic general equilibrium model to analyze the role of trading frictions in over-the-counter financial markets. In our model, agents face idiosyncratic preference shocks and a financial market allows them to rebalance their portfolio composed of liquid and illiquid assets in response to these shocks. We disentangle the effects of search and bargaining on welfare and study each one of them. We show that bargaining is welfare-improving for any inflation rate above the Friedman rule, while search frictions are not. This is because search frictions do not only affect the demand for the respective assets, but also their allocation.

Keywords: Monetary theory; over-the-counter markets; financial regulation; corporate bonds; liquidity (search for similar items in EconPapers)
JEL-codes: D47 D52 D62 E31 E44 E50 G11 G12 G28 (search for similar items in EconPapers)
Date: 2015-11, Revised 2017-07
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: The role of trading frictions in financial markets (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:211

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