Heterogeneity in Decentralized Asset Markets

Posted: 27 Nov 2019

See all articles by Julien Hugonnier

Julien Hugonnier

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

Benjamin 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: 2019-11-04

Abstract

We study a search and bargaining model of asset markets in which investors' heterogeneous valuations for the asset are drawn from an arbitrary distribution. We present a solution technique that makes the model fully tractable, and allows us to provide a complete characterization of the unique equilibrium, in closed form, both in and out of steady state. Using this characterization, we derive several novel implications that highlight the importance of heterogeneity. In particular, we show how some investors endogenously emerge as intermediaries, even though they have no advantage in contacting other agents or holding inventory; and we show how heterogeneity magnifies the impact of search frictions on asset prices, misallocation, and welfare.

Keywords: search frictions, bargaining, heterogeneity, price dispersion

JEL Classification: G11, G12, G21

Suggested Citation

Hugonnier, Julien and Lester, Benjamin and Weill, Pierre-Olivier, Heterogeneity in Decentralized Asset Markets (2019-11-04). FRB of Philadelphia Working Paper No. 19-44. Available at SSRN: https://ssrn.com/abstract=3494157 or http://dx.doi.org/10.21799/frbp.wp.2019.44

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

Benjamin Lester

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

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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