37 Pages Posted: 7 Jul 2009 Last revised: 25 Jan 2013
Date Written: January 24, 2013
Financial market liquidity has become increasingly fragmented across multiple trading platforms. We propose an intuitive welfare-based market quality metric that can properly aggregate local market conditions across both securities and trading venues. Our analysis rests on a general equilibrium model with segmented markets. Arbitrageurs reap profits by effectively providing intermediation services (i.e. “liquidity”). Our market quality measure is equal to the additional consumption enjoyed by investors as a result of this intermediation, and can be represented by means of a number of observable proxies. The model is especially well-suited to study the contagion-like effects of liquidity shocks.
Keywords: Fragmented markets, intermediation, arbitrage, liquidity, contagion
JEL Classification: G10, G20, D52, D53
Suggested Citation: Suggested Citation
Rahi, Rohit and Zigrand, Jean-Pierre, Market Quality and Contagion in Fragmented Markets (January 24, 2013). Available at SSRN: https://ssrn.com/abstract=1430573 or http://dx.doi.org/10.2139/ssrn.1430573