Fragmentation and Stability of Markets

Norwegian School of Economics (NHH), Department of Finance Working Paper No. 2013-7

41 Pages Posted: 3 Aug 2013 Last revised: 15 Oct 2015

See all articles by Daniel Ladley

Daniel Ladley

University of Leicester - School of Business

Terje Lensberg

Norwegian School of Economics (NHH) - Department of Finance

Jan Palczewski

University of Leeds - School of Mathematics

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics; Norwegian School of Economics (NHH) - Department of Finance

Date Written: September 10, 2015

Abstract

Trading skills are highly rewarded in practice but largely ignored in theoretical models of financial markets. This paper demonstrates the importance of skills by examining their interaction with market fragmentation and market stability. We consider a computational model where traders' abilities to accurately price assets are endogenous. In contrast to models that do not consider skills, we find that centralising markets can lead to higher price volatility and less resilience to shocks because it increases the equilibrium proportion of unskilled traders.

Keywords: Skills, market fragmentation, volatility, market resilience

JEL Classification: D47, D83, G11

Suggested Citation

Ladley, Daniel and Lensberg, Terje and Palczewski, Jan and Schenk-Hoppé, Klaus Reiner, Fragmentation and Stability of Markets (September 10, 2015). Norwegian School of Economics (NHH), Department of Finance Working Paper No. 2013-7. Available at SSRN: https://ssrn.com/abstract=2304450 or http://dx.doi.org/10.2139/ssrn.2304450

Daniel Ladley

University of Leicester - School of Business ( email )

University Road
Leicester, LE1 7RH
United Kingdom

Terje Lensberg

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
Bergen, N-5045
Norway
+47 5595 9206 (Phone)

Jan Palczewski

University of Leeds - School of Mathematics ( email )

Leeds, LS2 9JT
United Kingdom

HOME PAGE: http://www.maths.leeds.ac.uk/~jp

Klaus Reiner Schenk-Hoppé (Contact Author)

University of Manchester - Department of Economics ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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