Valuation in Dynamic Bargaining Markets
University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
Lasse Heje Pedersen
AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)
NYU Working Paper No. FIN-01-022
We study the impact on asset prices of illiquidity associated with search and bargaining in an economy in which agents can trade only when they find each other. Marketmakers' prices are higher and bid-ask spreads are lower if investors can find each other more easily. Prices become Walrasian as investors' or marketmakers' search intensities get large. Endogenizing search intensities yields natural welfare implications. Information can fail to be revealed through trading when search is difficult.
Number of Pages in PDF File: 45
Date posted: November 3, 2008