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A Search Model of Centralized and Decentralized Trade

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Author Info
Jianjun Miao (Department of Economics, Boston University)

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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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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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Find related papers by JEL classification:
D1 - Microeconomics - - Household Behavior
D2 - Microeconomics - - Production and Organizations
D3 - Microeconomics - - Distribution
D4 - Microeconomics - - Market Structure and Pricing

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004. "Over-the-Counter Markets," NBER Working Papers 10816, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
    • Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2005. "Over-the-Counter Markets," Econometrica, Econometric Society, vol. 73(6), pages 1815-1847, November. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. repec:rus:hseeco:72158 is not listed on IDEAS
  4. Madhavan, Ananth, 1995. "Consolidation, Fragmentation, and the Disclosure of Trading Information," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(3), pages 579-603. [Downloadable!] (restricted)
  5. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-50, September. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 57(2), pages 279-98, April. [Downloadable!] (restricted)
  9. Gehrig, Thomas, 1993. "Intermediation in Search Markets," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 2(1), pages 97-120, Spring.
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  10. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  11. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Blackwell Publishing, vol. 49(2), pages 217-27, April. [Downloadable!] (restricted)
  12. Spulber, Daniel F, 1996. "Market Making by Price-Setting Firms," Review of Economic Studies, Blackwell Publishing, vol. 63(4), pages 559-80, October. [Downloadable!] (restricted)
  13. Gale, Douglas, 1987. "Limit theorems for markets with sequential bargaining," Journal of Economic Theory, Elsevier, vol. 43(1), pages 20-54, October. [Downloadable!] (restricted)
  14. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, vol. 9(1), pages 47-73, March. [Downloadable!] (restricted)
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  15. 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. [Downloadable!] (restricted)
    Other versions:
  16. Pierre-Olivier Weill, 2004. "Leaning against the wind," 2004 Meeting Papers 382, Society for Economic Dynamics. [Downloadable!]
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  17. Pagano, Marco, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 255-74, May. [Downloadable!] (restricted)
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  18. Li, Yiting, 1998. "Middlemen and private information," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 131-159, June. [Downloadable!] (restricted)
  19. 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. [Downloadable!] (restricted)
  20. 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.
  21. Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, vol. 3(3), pages 257-275, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ricardo Lagos & Guillaume Rocheteau, 2008. "Liquidity in asset markets with search frictions," Staff Report 408, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  2. Ricardo Lagos & Guillaume Rocheteau, 2006. "Search in asset markets," Working Paper 0607, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  3. José Ramón Martínez-Resano, 2005. "Size and heterogeneity matter. A microstructure-based analysis of regulation of secondary markets for governments bonds," Banco de España Occasional Papers 0501, Banco de España. [Downloadable!]
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