Asset markets can achieve efficiency in the directed search framework
AbstractUsing a directed search model, modified from random matching, this paper investigates how trading frictions in asset markets affect portfolio choices, asset prices, and welfare. By solving the model numerically, it is demonstrated that the asset price increases (decreases) in the matching efficiency, if the relative risk aversion is smaller (larger) than unity. Efficient asset allocation is achieved in the directed search framework, while random matching is known not to achieve efficient allocation.
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Bibliographic InfoPaper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 09-33.
Length: 24 pages
Date of creation: Sep 2009
Date of revision:
directed search; asset market; social welfare; intermediation;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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