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A search model of centralized and decentralized trade

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  • Junjian Miao

    ()
    (Department of Economics, Boston University)

Abstract

This paper presents a search model of centralized and decentralized trade. In a centralized market, trades are intermediated by market makers at publicly posted bid–ask prices. In a decentralized market, traders search counterparties. Prices are negotiated and transactions are conducted in private meetings among traders. Traders can choose which market to enter. The determinants of bid–ask spreads and liquidity are analyzed. The welfare consequence of the market fragmentation is also analyzed. It is shown that compared to the competitive market-making, monopolistic market-making may improve social welfare. ? 2005 Elsevier Inc. All rights reserved.

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File URL: http://people.bu.edu/miaoj/intermedRED.pdf
File Function: Revised version, 2005
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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Macroeconomics Working Papers Series with number WP2005-012.

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Length: 25 pages
Date of creation:
Date of revision: Oct 2005
Publication status: Published in Review of Economic Dynamics
Handle: RePEc:bos:macppr:wp2005-012

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Keywords: Search; Matching and bargaining; Bid–ask spread; Liquidity; Welfare; Walrasian equilibriummarkets;

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References

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  1. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  2. repec:rus:hseeco:72158 is not listed on IDEAS
  3. Thomas Ho & Hans Stoll, . "Optimal Dealer Pricing Under Transactions and Return Uncertainty," Rodney L. White Center for Financial Research Working Papers 27-79, Wharton School Rodney L. White Center for Financial Research.
  4. Darrell Duffie & Nicolae Gârleanu & Lasse Heje Pedersen, 2007. "Valuation in Over-the-Counter Markets," Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1865-1900, November.
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  8. Thomas Gehrig, 1993. "Intermediation in Search Markets," Discussion Papers 1058, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  18. Lamoureux, Christopher G & Schnitzlein, Charles R, 1997. " When It's Not the Only Game in Town: The Effect of Bilateral Search on the Quality of a Dealer Market," Journal of Finance, American Finance Association, vol. 52(2), pages 683-712, June.
  19. Spulber, Daniel F, 1996. "Market Making by Price-Setting Firms," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 559-80, October.
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Citations

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Cited by:
  1. Guillaume Rocheteau & Pierre‐Olivier Weill, 2011. "Liquidity in Frictional Asset Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 261-282, October.
  2. José Ramón Martínez-Resano, 2005. "Size and heterogeneity matter. A microstructure-based analysis of regulation of secondary markets for governments bonds," Banco de Espa�a Occasional Papers 0501, Banco de Espa�a.
  3. Ricardo Lagos & Guillaume Rocheteau, 2006. "Search in asset markets," Staff Report 375, Federal Reserve Bank of Minneapolis.
  4. Afonso, Gara M. & Lagos, Ricardo, 2014. "Trade Dynamics in the Market for Federal Funds," Working Papers 710, Federal Reserve Bank of Minneapolis.
  5. Afonso, Gara M. & Lagos, Ricardo, 2014. "The Over-the-Counter Theory of the Fed Funds Market: A Primer," Working Papers 711, Federal Reserve Bank of Minneapolis.
  6. Makoto Watanabe, 2012. "Middlemen: A Directed Search Equilibrium Approach," Tinbergen Institute Discussion Papers 12-138/V, Tinbergen Institute.
  7. Yuet-Yee Wong & Randall Wright, 2011. "Buyers, Sellers and Middlemen: Variations on Search-Theoretic Themes," NBER Working Papers 17511, National Bureau of Economic Research, Inc.
  8. Makoto Watanabe, 2012. "Middlemen: A Directed Search Equilibrium Approach," Tinbergen Institute Discussion Papers 12-138/V, Tinbergen Institute.
  9. Ricardo Lagos & Guillaume Rocheteau, 2007. "Liquidity in asset markets with search frictions," Working Paper 0706, Federal Reserve Bank of Cleveland.
  10. Yumi Saita & Chihiro Shimizu & Tsutomu Watanabe, 2013. "Aging and Real Estate Prices:Evidence from Japanese and US Regional Data," UTokyo Price Project Working Paper Series 014, University of Tokyo, Graduate School of Economics, revised Dec 2013.
  11. Maria Eugénia Sanin, 2009. "Choosing a trading counterpart in the U.S. acid rain market," Working Papers hal-00437636, HAL.
  12. Yuet-Yee Wong & Randall Wright, 2011. "Buyers, sellers and middlemen: variations in search theory," Working Papers 691, Federal Reserve Bank of Minneapolis.
  13. Hajime Tomura, 2013. "Repos in Over-the-Counter Markets," UTokyo Price Project Working Paper Series 005, University of Tokyo, Graduate School of Economics.
  14. Hajime Tomura, 2012. "On the Existence and Fragility of Repo Markets," Working Papers 12-17, Bank of Canada.

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