Centralized vs Decentralized Markets: The Role of Connectivity

79 Pages Posted: 5 Feb 2024

See all articles by Simone Alfarano

Simone Alfarano

Jaume I University - Department of Economics

Albert Banal-Estañol

Universitat Pompeu Fabra; City University London

Eva Camacho

LINEEX and University Jaume I of Castellon

Giulia Iori

City University London - Department of Economics

Burcu Kapar

American University in Dubai

Rohit Rahi

London School of Economics - Department of Finance; London School of Economics & Political Science (LSE) - Financial Markets Group

Date Written: January 14, 2024

Abstract

We consider a setting in which privately informed agents are located in a network and trade a risky asset with other agents with whom they are directly connected. We compare the performance, both theoretically and experimentally, of a complete network (centralized market) to incomplete networks with differing levels of connectivity (decentralized markets). We show that decentralized markets can deliver higher informational efficiency, with prices closer to fundamentals, as well as higher welfare for mean-variance investors.

Keywords: Networks, heuristic learning, informational efficiency, experimental asset markets.

JEL Classification: C92, D82, G14

Suggested Citation

Alfarano, Simone and Banal-Estañol, Albert and Camacho, Eva and Iori, Giulia and KAPAR, BURCU and Rahi, Rohit, Centralized vs Decentralized Markets: The Role of Connectivity (January 14, 2024). Available at SSRN: https://ssrn.com/abstract=4698513 or http://dx.doi.org/10.2139/ssrn.4698513

Simone Alfarano

Jaume I University - Department of Economics

Albert Banal-Estañol

Universitat Pompeu Fabra

City University London

Eva Camacho

LINEEX and University Jaume I of Castellon

Campus Riu Sec
Dept. of Economics
12080 Castellon
Spain

Giulia Iori

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

BURCU KAPAR

American University in Dubai ( email )

Dubai, UAE 28282
United Arab Emirates

Rohit Rahi (Contact Author)

London School of Economics - Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 20 7955 7313 (Phone)

HOME PAGE: http://https://sites.google.com/lse.ac.uk/rohit-rahi

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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