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Decentralized Exchange

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Author Info

  • Semyon Malamud

    () (Swiss Finance Institute, EPF Lausanne)

  • Marzena Rostek

    () (Department of Economics, University of Wisconsin-Madison)

Abstract

We develop a model of decentralized markets in which trading environment is determined by a general network structure. We study how the equilibrium allocation and liquidity depend on the network topology and how an agent’s risk exposure depends on other agents’ exposures. Agents hold several, position specific “local market portfolios,” that also determine the “local market clearing prices”. The impact of one trader on another decays exponentially in the distance in the network, at an explicitly given equilibrium rate. Decentralized trading may increase welfare. Liquidity may be higher for “less connected” networks.

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File URL: http://www.NETinst.org/Rostek_12-18.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 12-18.

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Length: 48 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:net:wpaper:1218

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Web page: http://www.NETinst.org/

Related research

Keywords: Asset pricing; Decentralized Market; Trading Network; Over-the-counter; Welfare;

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References

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  1. Darrell DUFFIE & Semyon MALAMUD & Gustavo MANSO, . "Information Percolation with Equilibrium Search Dynamics," Swiss Finance Institute Research Paper Series 09-02, Swiss Finance Institute.
  2. Ricardo Lagos & Guillaume Rocheteau & Pierre-Olivier Weill, 2009. "Crises and Liquidity in Over-the-Counter Markets," NBER Working Papers 15414, National Bureau of Economic Research, Inc.
  3. Pierre-Olivier Weill, 2004. "Liquidity Premia in Dynamic Bargaining Markets," Econometric Society 2004 North American Winter Meetings 648, Econometric Society.
  4. Darrell Duffie & Semyon Malamud & Gustavo Manso, 2011. "Information Percolation in Segmented Markets," NBER Working Papers 17295, National Bureau of Economic Research, Inc.
  5. Pierre-Olivier Weill & Dimitri Vayanos, 2007. "A Search-Based Theory of the On-the-Run Phenomenon," FMG Discussion Papers dp577, Financial Markets Group.
  6. Ana Babus & Péter Kondor, 2012. "Trading and Information Diffusion in Over-the-Counter Markets," CEU Working Papers 2012_19, Department of Economics, Central European University, revised 09 Dec 2012.
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