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Fragmentation and stability of markets

Author

Listed:
  • Ladley, Daniel
  • Lensberg, Terje
  • Palczewski, Jan
  • Schenk-Hoppé, Klaus Reiner

Abstract

Trading skills are highly rewarded in practice but largely ignored in theoretical models of financial markets. This paper demonstrates the importance of skills by examining their interaction with market fragmentation and market stability. We consider a computational model where traders’ abilities to accurately price assets are endogenous. In contrast to models that do not consider skills, we find that centralising markets can lead to higher price volatility and less resilience to shocks because it increases the equilibrium proportion of unskilled traders.

Suggested Citation

  • Ladley, Daniel & Lensberg, Terje & Palczewski, Jan & Schenk-Hoppé, Klaus Reiner, 2015. "Fragmentation and stability of markets," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 466-481.
    • Handle: RePEc:eee:jeborg:v:119:y:2015:i:c:p:466-481
    DOI: 10.1016/j.jebo.2015.09.013
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    Citations

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    Cited by:

    1. Guo, Wen & Liu, Xiaorui, 2022. "Market fragmentation of energy resource prices and green total factor energy efficiency in China," Resources Policy, Elsevier, vol. 76(C).
    2. Noemi Schmitt & Ivonne Schwartz & Frank Westerhoff, 2022. "Heterogeneous speculators and stock market dynamics: a simple agent-based computational model," The European Journal of Finance, Taylor & Francis Journals, vol. 28(13-15), pages 1263-1282, October.
    3. Xing Gao & Daniel Ladley, 2022. "Noise trading and market stability," The European Journal of Finance, Taylor & Francis Journals, vol. 28(13-15), pages 1283-1301, October.
    4. Mitja Steinbacher & Matthias Raddant & Fariba Karimi & Eva Camacho Cuena & Simone Alfarano & Giulia Iori & Thomas Lux, 2021. "Advances in the agent-based modeling of economic and social behavior," SN Business & Economics, Springer, vol. 1(7), pages 1-24, July.
    5. Ladley, Daniel, 2020. "The high frequency trade off between speed and sophistication," Journal of Economic Dynamics and Control, Elsevier, vol. 116(C).
    6. Daniel Ladley, 2019. "The Design and Regulation of High Frequency Traders," Discussion Papers in Economics 19/02, Division of Economics, School of Business, University of Leicester.

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    More about this item

    Keywords

    Skills; Market fragmentation; Volatility; Market resilience;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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