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Decentralized Trade with Private Values

Author

Listed:
  • Bruno Sultanum

    (Federal Reserve Bank of Richmond)

  • Zachary Bethune

    (University of Virginia)

Abstract

This paper studies trading dynamics in a decentralized market with incomplete information where agents valuations are independent and change over time. The model builds on Hugonnier et al. (2014) with two modifications: investors valuations are private information and bilateral trade occurs using the k-double auction proposed by Chatterjee and Samuelson (1983). We derive necessary and sufficient conditions for a steady state equilibrium, use numerical methods to solve for equilibria and study its properties. In particular, we study the effect of dispersion in private values on key variables such as trade volume, bid-ask spreads and the intensity of trade of different agents. Importantly, we show considering incomplete information will lead to different comparative statics with respect to dispersion and search frictions.

Suggested Citation

  • Bruno Sultanum & Zachary Bethune, 2016. "Decentralized Trade with Private Values," 2016 Meeting Papers 1630, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1630
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    References listed on IDEAS

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    1. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    2. Veronica Guerrieri & Robert Shimer & Randall Wright, 2010. "Adverse Selection in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 78(6), pages 1823-1862, November.
    3. Richard C. Green & Burton Hollifield & Norman Schürhoff, 2007. "Financial Intermediation and the Costs of Trading in an Opaque Market," Review of Financial Studies, Society for Financial Studies, vol. 20(2), pages 275-314.
    4. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
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    12. Thorsten Koeppl & Jonathan Chiu, 2013. "Trading Dynamics With Adverse Selection and Search," 2013 Meeting Papers 201, Society for Economic Dynamics.
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    Citations

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    Cited by:

    1. Julien Hugonnier & Benjamin Lester & Pierre-Olivier Weill, 2020. "Frictional Intermediation in Over-the-Counter Markets," Review of Economic Studies, Oxford University Press, vol. 87(3), pages 1432-1469.
    2. Sultanum, Bruno, 2018. "Financial fragility and over-the-counter markets," Journal of Economic Theory, Elsevier, vol. 177(C), pages 616-658.
    3. Chung-Yi Tse & Yujing Xu, 2021. "Inter-Dealer Trades in OTC Markets - Who Buys and Who Sells?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 220-257, January.
    4. Julian Kozlowski, 2021. "Long-Term Finance and Investment with Frictional Asset Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(4), pages 411-448, October.
    5. Athanasios Geromichalos & Kuk Mo Jung & Seungduck Lee & Dillon Carlos, 2019. "Asset Liquidity in Monetary Theory and Finance: A Unified Approach," Working Papers 330, University of California, Davis, Department of Economics.
    6. Zachary Bethune & Bruno Sultanum & Nicholas Trachter, 2019. "Asset Issuance in Over-the-Counter Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 4-29, July.
    7. Julian Kozlowski, 2017. "Long-Term Finance and Economic Development: The Role of Liquidity in Corporate Debt Markets," 2017 Meeting Papers 699, Society for Economic Dynamics.
    8. Geromichalos, Athanasios & Jung, Kuk Mo & Lee, Seungduck & Carlos, Dillon, 2021. "A model of endogenous direct and indirect asset liquidity," European Economic Review, Elsevier, vol. 132(C).

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    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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