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Heterogeneous beliefs in over-the-counter markets

  • De Kamps, Marc
  • Ladley, Daniel
  • Simaitis, Aistis

The behavior and stability of over-the-counter markets is of central concern to regulators. Little is known, however, about how the structure of these markets determine their properties. In this paper we consider an over-the-counter market populated by boundedly rational heterogeneous traders in which the structure is represented by a network. Stability is found to decrease as the market becomes less well connected, however, the configuration of connections has a significant effect. The presence of hubs, such as those found in scale free networks increases stability and decreases volatility whilst small-world short-cut links have the opposite effect. Volatility in the fundamental value increases market volatility, however, volatility in the riskless asset returns has an ambiguous effect.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 41 (2014)
Issue (Month): C ()
Pages: 50-68

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Handle: RePEc:eee:dyncon:v:41:y:2014:i:c:p:50-68
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