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Asset markets can achieve efficiency in the directed search framework

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  • Shoko Morimoto

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    (Graduate School of Economics, Osaka University)

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    Abstract

    Using 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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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0933.pdf
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    Bibliographic Info

    Paper 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.

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    Length: 24 pages
    Date of creation: Sep 2009
    Date of revision:
    Handle: RePEc:osk:wpaper:0933

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Keywords: directed search; asset market; social welfare; intermediation;

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    1. Ricardo Lagos, 2006. "Asset prices and liquidity in an exchange economy," Staff Report, Federal Reserve Bank of Minneapolis 373, Federal Reserve Bank of Minneapolis.
    2. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(2), pages 279-98, April.
    3. Ricardo Lagos & Guillaume Rocheteau, 2007. "Search in asset markets: market structure, liquidity, and welfare," Working Paper 0701, Federal Reserve Bank of Cleveland.
    4. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum, Oslo University, Department of Economics 37/1995, Oslo University, Department of Economics.
    5. Dmitrios Vayanos, 2004. "Search and Endogenous Concentration of Liquidity in Asset Markets," Econometric Society 2004 North American Winter Meetings, Econometric Society 647, Econometric Society.
    6. Dimitri Vayanos & Pierre-Olivier Weill, 2006. "A Search-Based Theory of the On-the-Run Phenomenon," NBER Working Papers 12670, National Bureau of Economic Research, Inc.
    7. Weill, Pierre-Olivier, 2008. "Liquidity premia in dynamic bargaining markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 140(1), pages 66-96, May.
    8. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
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