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.
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17295, National Bureau of Economic Research, Inc.
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