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Heterogeneity in decentralized asset markets

Author: Julien Hugonnier; Benjamin Lester; Pierre-Olivier Weill; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2014.
Series: Working paper series (National Bureau of Economic Research), no. 20746.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
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  Read more...
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Details

Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Julien Hugonnier; Benjamin Lester; Pierre-Olivier Weill; National Bureau of Economic Research,
OCLC Number: 900545253
Notes: "December 2014"
Description: 1 online resource (70 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 20746.
Responsibility: Julien Hugonnier, Benjamin Lester, Pierre-Olivier Weill.

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.

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