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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. Spulber, Daniel F, 1996. "Market Making by Price-Setting Firms," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 559-80, October.
  2. Li, Yiting, 1998. "Middlemen and private information," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 131-159, June.
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  8. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004. "Over-the-Counter Markets," NBER Working Papers 10816, National Bureau of Economic Research, Inc.
  9. 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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  13. 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.
  14. John Rust & George Hall, 2001. "Middle Men Versus Market Makers: A Theory of Competitive Exchange," Cowles Foundation Discussion Papers 1299, Cowles Foundation for Research in Economics, Yale University.
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  20. Dmitrios Vayanos, 2004. "Search and Endogenous Concentration of Liquidity in Asset Markets," Econometric Society 2004 North American Winter Meetings 647, Econometric Society.
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Cited by:
  1. 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.
  2. 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.
  3. Ricardo Lagos & Guillaume Rocheteau, 2007. "Liquidity in asset markets with search frictions," Working Paper 0706, Federal Reserve Bank of Cleveland.
  4. Ricardo Lagos & Guillaume Rocheteau, 2006. "Search in asset markets," Staff Report 375, Federal Reserve Bank of Minneapolis.
  5. Hajime Tomura, 2013. "Investment Horizon and Repo in the Over-the-Counter Market," UTokyo Price Project Working Paper Series 014, University of Tokyo, Graduate School of Economics.
  6. Maria Eugénia Sanin, 2009. "Choosing a trading counterpart in the U.S. acid rain market," Working Papers hal-00437636, HAL.
  7. Yuet-Yee Wong & Randall Wright, 2011. "Buyers, sellers and middlemen: variations in search theory," Working Papers 691, Federal Reserve Bank of Minneapolis.
  8. 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.
  9. Gara Afonso & Ricardo Lagos, 2012. "Trade dynamics in the market for federal funds," Staff Reports 549, Federal Reserve Bank of New York.
  10. Hajime Tomura, 2012. "On the Existence and Fragility of Repo Markets," Working Papers 12-17, Bank of Canada.
  11. Hajime Tomura, 2013. "Repos in Over-the-Counter Markets," UTokyo Price Project Working Paper Series 005, University of Tokyo, Graduate School of Economics.
  12. Makoto Watanabe, 2012. "Middlemen: A Directed Search Equilibrium Approach," Tinbergen Institute Discussion Papers 12-138/V, Tinbergen Institute.
  13. Makoto Watanabe, 2012. "Middlemen: A Directed Search Equilibrium Approach," Tinbergen Institute Discussion Papers 12-138/V, Tinbergen Institute.

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