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Search and endogenous concentration of liquidity in asset markets

Vayanos, Dimitri and Wang, Tan (2004) Search and endogenous concentration of liquidity in asset markets. 647. Econometric Society 2004 North American Winter Meetings, London, UK.

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Abstract

We develop a search-based model of asset trading, in which investors of different horizons can invest in two identical assets. The asset markets are partially segmented: buyers can search for only one asset, but can decide which one. We show that there exists a "clientele" equilibrium where one market has more buyers and sellers, lower search times, higher trading volume, higher prices, and short-horizon investors. This equilibrium dominates the ones where the two markets are identical, implying that the concentration of liquidity in one asset is socially desirable. At the same time, too many buyers decide to search for the liquid asset.

Item Type: Monograph (Working Paper)
Official URL: http://www.lse.ac.uk/collections/accountingAndFina...
Additional Information: Published 2004 © Dimitri Vayanos. LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website.
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Accounting and Finance
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 647
Date Deposited: 10 Nov 2005
URL: http://eprints.lse.ac.uk/455/

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