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Decentralized Exchange

Author

Listed:
  • Semyon Malamud

    (Swiss Finance Institute, EPF Lausanne)

  • Marzena Rostek

    (Department of Economics, University of Wisconsin-Madison)

Abstract

We develop a model of decentralized markets in which trading environment is determined by a general network structure. We study how the equilibrium allocation and liquidity depend on the network topology and how an agent’s risk exposure depends on other agents’ exposures. Agents hold several, position specific “local market portfolios,” that also determine the “local market clearing prices”. The impact of one trader on another decays exponentially in the distance in the network, at an explicitly given equilibrium rate. Decentralized trading may increase welfare. Liquidity may be higher for “less connected” networks.

Suggested Citation

  • Semyon Malamud & Marzena Rostek, 2012. "Decentralized Exchange," Working Papers 12-18, NET Institute.
    • Handle: RePEc:net:wpaper:1218
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Lester, Benjamin & Weill, Pierre-Olivier & Hugonnier, Julien, 2022. "Heterogeneity in decentralized asset markets," Theoretical Economics, Econometric Society, vol. 17(3), July.
    2. Donna, Javier D. & Schenone, Pablo & Veramendi, Gregory F., 2020. "Networks, frictions, and price dispersion," Games and Economic Behavior, Elsevier, vol. 124(C), pages 406-431.
    3. Havran, Dániel & Erb, Tamás, 2015. "Mit veszítünk a piaci súrlódásokkal?. A pénzügyi piacok mikrostruktúrája [Trading mechanisms and market frictions. Microstructure of the financial markets]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(3), pages 229-262.
    4. Dan Li & Norman Schürhoff, 2019. "Dealer Networks," Journal of Finance, American Finance Association, vol. 74(1), pages 91-144, February.
    5. Semih Üslü, 2019. "Pricing and Liquidity in Decentralized Asset Markets," Econometrica, Econometric Society, vol. 87(6), pages 2079-2140, November.
    6. Antoaneta Sergueiva, 2013. "Systemic Risk Identification, Modelling, Analysis, and Monitoring: An Integrated Approach," Papers 1310.6486, arXiv.org.

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    More about this item

    Keywords

    Asset pricing; Decentralized Market; Trading Network; Over-the-counter; Welfare;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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