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A search model of centralized and decentralized trade

Author

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  • Jianjun Miao

    (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. It is shown that compared to the competitive market-making, monopolistic market-making may improve social welfare. (Copyright: Elsevier)

Suggested Citation

  • Jianjun Miao, 2006. "A search model of centralized and decentralized trade," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 68-92, January.
  • Handle: RePEc:red:issued:v:9:y:2006:i:1:p:68-92
    DOI: 10.1016/j.red.2005.10.003
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Alessandro Gavazza, 2016. "An Empirical Equilibrium Model of a Decentralized Asset Market," Econometrica, Econometric Society, vol. 84, pages 1755-1798, September.
    2. Ricardo Lagos & Guillaume Rocheteau, 2009. "Liquidity in Asset Markets With Search Frictions," Econometrica, Econometric Society, vol. 77(2), pages 403-426, March.
    3. Ricardo Lagos & Guillaume Rocheteau, 2006. "Search in asset markets," Staff Report 375, Federal Reserve Bank of Minneapolis.
    4. Hajime Tomura, 2013. "Repos in Over-the-Counter Markets," UTokyo Price Project Working Paper Series 005, University of Tokyo, Graduate School of Economics.
    5. Makoto Watanabe, 2012. "Middlemen: A Directed Search Equilibrium Approach," Tinbergen Institute Discussion Papers 12-138/V, Tinbergen Institute.
    6. Gara Afonso & Ricardo Lagos, 2015. "Trade Dynamics in the Market for Federal Funds," Econometrica, Econometric Society, vol. 83, pages 263-313, January.
    7. Guillaume Rocheteau & Pierre‐Olivier Weill, 2011. "Liquidity in Frictional Asset Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 261-282, October.
    8. Hajime Tomura, 2016. "Investment Horizon and Repo in the Over‐the‐Counter Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 145-164, February.
    9. José Ramón Martínez-Resano, 2005. "Size and heterogeneity matter. A microstructure-based analysis of regulation of secondary markets for governments bonds," Occasional Papers 0501, Banco de España;Occasional Papers Homepage.
    10. Hajime Tomura, 2012. "On the Existence and Fragility of Repo Markets," Staff Working Papers 12-17, Bank of Canada.
    11. 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.
    12. Gara Afonso & Ricardo Lagos, 2015. "The Over‐the‐Counter Theory of the Fed Funds Market: A Primer," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 127-154, June.
    13. Yuet-Yee Wong & Randall Wright, 2011. "Buyers, Sellers and Middlemen: Variations on Search-Theoretic Themes," 2011 Meeting Papers 374, Society for Economic Dynamics.
    14. Hajime Tomura, 2014. "Investment Horizon and Repo in the Over-the-Counter Market," UTokyo Price Project Working Paper Series 026, University of Tokyo, Graduate School of Economics.
    15. Yumi Saita & Chihiro Shimizu & Tsutomu Watanabe, 2013. "Aging and Real Estate Prices:Evidence from Japanese and US Regional Data," UTokyo Price Project Working Paper Series 014, University of Tokyo, Graduate School of Economics, revised Dec 2013.
    16. repec:spr:etbull:v:3:y:2015:i:2:d:10.1007_s40505-014-0035-7 is not listed on IDEAS
    17. Yuet-Yee Wong & Randall Wright, 2011. "Buyers, sellers and middlemen: variations in search theory," Working Papers 691, Federal Reserve Bank of Minneapolis.
    18. Maria Eugénia Sanin, 2009. "Choosing a trading counterpart in the U.S. acid rain market," Working Papers hal-00437636, HAL.

    More about this item

    Keywords

    Search; Matching and bargaining; Bid.ask spread; Liquidity; Welfare; Walrasian equilibrium;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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