Equilibrium Theory of Financial Markets: Recent Developments

Abstract

This article reviews the theory of imperfectly competitive financial markets with special attention to recent contributions and rapidly growing new areas of research. We survey the literature on advances that have led to a common analytic framework for static, dynamic, centralized, and decentralized markets. This allows us to highlight the results that arise when traders have price impact (but not in competitive markets) and, separately, those that arise with market fragmentation.

Keywords: Imperfect competition, Price impact, Decentralized trading, Efficiency, Financial innovation, Market design

JEL Classification: D47, D53, G11, G12