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Search and Endogenous Concentration of Liquidity in Asset Markets

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  • dvayanos

Abstract

In this paper, we develop a search-based model of asset trading. We assume that investors differ in their horizons, and can invest in two identical assets. The asset markets are partially segmented: investors can search in only one market, but can decide which one. We show that there exist a continuum of symmetric equilibria where investors are indifferent between the two markets, and a unique clientele equilibrium where short-horizon investors strictly prefer one market. This ``liquid" market has higher volume and prices, and lower search times for buyers and sellers. The clientele equilibrium generally dominates the symmetric ones, i.e., the concentration of liquidity is socially desirable. In some cases, however, the clientele equilibrium is dominated, and in these cases the entry of buyers in the liquid market is below the socially optimal level.

Suggested Citation

  • dvayanos, 2004. "Search and Endogenous Concentration of Liquidity in Asset Markets," Econometric Society 2004 North American Winter Meetings 635, Econometric Society.
    • Handle: RePEc:ecm:nawm04:635
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    Cited by:

    1. Carolin E. Pflueger & Luis M. Viceira, 2011. "Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity," Harvard Business School Working Papers 11-094, Harvard Business School, revised Sep 2013.

    More about this item

    Keywords

    search; liquidity premia; welfare;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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