Pricing and Liquidity in Decentralized Asset Markets

Semih Üslü

doi:10.3982/ecta14713

journal article Jan 01, 2019

Pricing and Liquidity in Decentralized Asset Markets

Semih Üslü

Econometrica Vol. 87 No. 6 pp. 2079-2140 · JSTOR

View at Publisher Save 10.3982/ecta14713

Abstract

I develop a search‐and‐bargaining model of endogenous intermediation in over‐the‐counter markets. Unlike the existing work, my model allows for rich investor heterogeneity in three simultaneous dimensions: preferences, inventories, and meeting rates. By comparing trading‐volume patterns that arise in my model and are observed in practice, I argue that the heterogeneity in meeting rates is the main driver of intermediation patterns. I find that investors with higher meeting rates (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 aspeed premium, and (ii) fast investors hold more extreme inventories. Then, I use the model to study the effect of trading frictions on the supply and price of liquidity. On social welfare, I show that the interaction of meeting rate heterogeneity with optimal inventory management makes the equilibrium inefficient. I provide a financial transaction tax/subsidy scheme that corrects this inefficiency, in which fast investors cross‐subsidize slow investors.

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References

Details

Published: Jan 01, 2019
Vol/Issue: 87(6)
Pages: 2079-2140

Authors

S

Semih Üslü

Carey Business School, Johns Hopkins University

Cite This Article

Semih Üslü (2019). Pricing and Liquidity in Decentralized Asset Markets. Econometrica, 87(6), 2079-2140. https://doi.org/10.3982/ecta14713

Pricing and Liquidity in Decentralized Asset Markets

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