Heterogeneity in Decentralized Asset Markets

86 Pages Posted: 5 Dec 2014 Last revised: 5 Apr 2018

See all articles by Julien Hugonnier

Julien Hugonnier

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Benjamin R. Lester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Pierre-Olivier Weill

University of California, Los Angeles; National Bureau of Economic Research (NBER)

Multiple version iconThere are 6 versions of this paper

Date Written: December 3, 2014

Abstract

We study a search and bargaining model of an asset market, where investors’ heterogeneous valuations for the asset are drawn from an arbitrary distribution. Our solution technique makes the model fully tractable and allows us to provide a full characterization of the unique equilibrium, in closed-form, both in and out of steady-state. Using this characterization, we first establish that the model generates aggregate trading patterns that are consistent with those observed in many over-the-counter asset markets. Then, we show that the model can replicate empirical regularities reported from micro-level data sets, including the relationships between the length of the intermediation chains through which assets are reallocated, the network centrality of the dealers involved in these chains, and the markup charged on the asset being passed along the chain. Finally, we show that heterogeneity magnifies the price impact of search frictions, and that this impact is more pronounced on price levels than on price dispersion. Hence, using observed price dispersion to quantify the effect of search frictions on price discounts or premia can be misleading.

Keywords: search frictions, bargaining, continuum of types, price dispersion, intermediation chains.

JEL Classification: G11, G12, G21

Suggested Citation

Hugonnier, Julien and Lester, Benjamin R. and Weill, Pierre-Olivier, Heterogeneity in Decentralized Asset Markets (December 3, 2014). Swiss Finance Institute Research Paper No. 14-67, Available at SSRN: https://ssrn.com/abstract=2533406 or http://dx.doi.org/10.2139/ssrn.2533406

Julien Hugonnier (Contact Author)

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL Dorigny
Extranef
Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/hugonnier

Swiss Finance Institute

c/o University of Geneva
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CH-1211 Geneva 4
Switzerland

Benjamin R. Lester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

HOME PAGE: http://sites.google.com/site/benjaminrlester

Pierre-Olivier Weill

University of California, Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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