Heterogeneity in Decentralized Asset Markets

73 Pages Posted: 29 May 2015

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: May 2015

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 renders the analysis fully tractable and allows us to provide a full characterization of the equilibrium, in closed-form, both in and out of steady-state. We use this characterization for two purposes. First, we establish that the model can naturally account for a number of stylized facts that have been documented in empirical studies of over-the-counter asset markets. In particular, we show that heterogeneity among market participants implies that assets are reallocated through “intermediation chains,” ultimately producing a core-periphery trading network and non-trivial distributions of prices and trading times. Second, we show that the model generates a number of novel results that underscore the importance of heterogeneity in decentralized markets. We highlight two: First, heterogeneity magnifies the price impact of search frictions; and second, search frictions have larger effects on price levels than on price dispersion. Hence, quantifying the price discount or premium created by search frictions based on observed price dispersion can be misleading.

Keywords: Search Frictions, Bargaining, Continuum of Types, Price Dispersion

JEL Classification: G11, G12, G21

Suggested Citation

Hugonnier, Julien and Lester, Benjamin R. and Weill, Pierre-Olivier, Heterogeneity in Decentralized Asset Markets (May 2015). FRB of Philadelphia Working Paper No. 15-22, Available at SSRN: https://ssrn.com/abstract=2611084 or http://dx.doi.org/10.2139/ssrn.2611084

Julien Hugonnier

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
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Benjamin R. Lester (Contact Author)

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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