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Heterogeneous Beliefs in Over-The-Counter Markets

  • Marc de Kamps
  • Daniel Ladley

    ()

  • Aistis Simaitis

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 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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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 13/03.

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Date of creation: Aug 2012
Date of revision: Sep 2013
Handle: RePEc:lec:leecon:13/03
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