Liquidity in Competitive Dealer Markets

26 Pages Posted: 8 Aug 2018

See all articles by Peter Bank

Peter Bank

Humboldt University of Berlin - Department of Mathematics

Ibrahim Ekren

Florida State University

Johannes Muhle-Karbe

Imperial College London - Department of Mathematics

Date Written: July 22, 2018

Abstract

We study a continuous-time version of the intermediation model of Grossman and Miller (1988). To wit, we solve for the competitive equilibrium prices at which liquidity takers' demands are absorbed by dealers with quadratic inventory costs, who can in turn gradually transfer these positions to an end-user market. This endogenously leads to a model with transient price impact. Smooth, diffusive, and discrete trades all incur finite but nontrivial liquidity costs, and can arise naturally from the liquidity takers' optimization.

Keywords: dealer market, dynamic equilibrium, endogenous liquidity

JEL Classification: C68, D43, G12

Suggested Citation

Bank, Peter and Ekren, Ibrahim and Muhle-Karbe, Johannes, Liquidity in Competitive Dealer Markets (July 22, 2018). Available at SSRN: https://ssrn.com/abstract=3217847 or http://dx.doi.org/10.2139/ssrn.3217847

Peter Bank

Humboldt University of Berlin - Department of Mathematics ( email )

Unter den Linden 6
Berlin, D-10099
Germany

Ibrahim Ekren

Florida State University ( email )

1017 Academic Way,
224 LOVE Building
Tallahassee, FL 32306
United States
7342741176 (Phone)

Johannes Muhle-Karbe (Contact Author)

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
Imperial College
LONDON, SW7 2AZ
United Kingdom

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