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A Search Model of Centralized and Decentralized Trade

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  • Jianjun 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 determinant of bid-ask spreads and liquidity is analyzed. The welfare consequence of the market fragmentation is also analyzed.

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File URL: http://128.118.178.162/eps/mic/papers/0410/0410003.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 0410003.

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Date of creation: 16 Oct 2004
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Handle: RePEc:wpa:wuwpmi:0410003

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Web page: http://128.118.178.162

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  1. John Rust & George Hall, 2003. "Middlemen versus Market Makers: A Theory of Competitive Exchange," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 353-403, April.
  2. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  3. Dmitrios Vayanos, 2004. "Search and Endogenous Concentration of Liquidity in Asset Markets," Econometric Society 2004 North American Winter Meetings 647, Econometric Society.
  4. 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.
  5. Pierre-Olivier Weill, 2007. "Leaning Against the Wind," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1329-1354.
  6. Tamar Kugler & Zvika Neeman & Nir Vulkan, 2003. "Markets Versus Negotiations: An Experimental Investigation," Discussion Paper Series dp319, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  7. Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, vol. 3(3), pages 257-275, June.
  8. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004. "Over-the-Counter Markets," NBER Working Papers 10816, National Bureau of Economic Research, Inc.
  9. Dale T. Mortensen & Randall Wright, 2002. "Competitive Pricing and Efficiency in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 1-20, February.
  10. Spulber, Daniel F, 1996. "Market Making by Price-Setting Firms," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 559-80, October.
  11. Lippman, Steven A & McCall, John J, 1986. "An Operational Measure of Liquidity," American Economic Review, American Economic Association, vol. 76(1), pages 43-55, March.
  12. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
  13. Douglas Gale, 2010. "Limit theorems for markets with sequential bargaining," Levine's Working Paper Archive 621, David K. Levine.
  14. Li, Yiting, 1998. "Middlemen and private information," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 131-159, June.
  15. Pagano, Marco, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 255-74, May.
  16. Biais, Bruno, 1993. " Price Information and Equilibrium Liquidity in Fragmented and Centralized Markets," Journal of Finance, American Finance Association, vol. 48(1), pages 157-85, March.
  17. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  18. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2006. "Valuation in Over-the-Counter Markets," NBER Working Papers 12020, National Bureau of Economic Research, Inc.
  19. Thomas Gehrig, 1993. "Intermediation in Search Markets," Discussion Papers 1058, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  20. Madhavan, Ananth, 1995. "Consolidation, Fragmentation, and the Disclosure of Trading Information," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 579-603.
  21. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-50, September.
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  23. repec:rus:hseeco:72158 is not listed on IDEAS
  24. 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.
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Citations

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Cited by:
  1. Ricardo Lagos & Guillaume Rocheteau, 2006. "Search in Asset Markets," 2006 Meeting Papers 869, Society for Economic Dynamics.
  2. Guillaume Rocheteau & Pierre-Olivier Weill, 2011. "Liquidity in frictional asset markets," Working Paper 1105, Federal Reserve Bank of Cleveland.
  3. Ricardo Lagos & Guillaume Rocheteau, 2007. "Liquidity in asset markets with search frictions," Working Paper 0706, Federal Reserve Bank of Cleveland.
  4. Gara Afonso & Ricardo Lagos, 2012. "Trade dynamics in the market for federal funds," Staff Reports 549, Federal Reserve Bank of New York.
  5. Maria Eugénia Sanin, 2009. "Choosing a trading counterpart in the U.S. acid rain market," Working Papers hal-00437636, HAL.
  6. 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.
  7. Yuet-Yee Wong & Randall Wright, 2011. "Buyers, sellers and middlemen: variations in search theory," Working Papers 691, Federal Reserve Bank of Minneapolis.
  8. Hajime Tomura, 2012. "On the Existence and Fragility of Repo Markets," Working Papers 12-17, Bank of Canada.
  9. Hajime Tomura, 2013. "Repos in Over-the-Counter Markets," UTokyo Price Project Working Paper Series 005, University of Tokyo, Graduate School of Economics.
  10. 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.
  11. Makoto Watanabe, 2012. "Middlemen: A Directed Search Equilibrium Approach," Tinbergen Institute Discussion Papers 12-138/V, Tinbergen Institute.
  12. 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.
  13. Makoto Watanabe, 2012. "Middlemen: A Directed Search Equilibrium Approach," Tinbergen Institute Discussion Papers 12-138/V, Tinbergen Institute.

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