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Heterogeneity in Decentralized Asset Markets

Author

Listed:
  • Julien Hugonnier
  • Benjamin Lester
  • Pierre-Olivier Weill

Abstract

We study a search and bargaining model of asset markets in which investors? heterogeneous valuations for the asset are drawn from an arbitrary distribution. We present a solution technique that makes the model fully tractable, and allows us to provide a complete characterization of the unique equilibrium, in closed form, both in and out of steady state. Using this characterization, we derive several novel implications that highlight the importance of heterogeneity. In particular, we show how some investors endogenously emerge as intermediaries, even though they have no advantage in contacting other agents or holding inventory; and we show how heterogeneity magnifies the impact of search frictions on asset prices, misallocation, and welfare.

Suggested Citation

  • Julien Hugonnier & Benjamin Lester & Pierre-Olivier Weill, 2019. "Heterogeneity in Decentralized Asset Markets," Working Papers 19-44, Federal Reserve Bank of Philadelphia, revised 04 Nov 2019.
  • Handle: RePEc:fip:fedpwp:19-44
    DOI: 10.21799/frbp.wp.2019.44
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    References listed on IDEAS

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    More about this item

    Keywords

    bargaining; price dispersion; search frictions; heterogeneity;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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