Pricing and Liquidity in Decentralized Asset Markets

Abstract

I develop a search-and-bargaining model of liquidity provision in over-the-counter markets where investors di¤er in their search intensities. A distinguishing characteristic of my model is its tractability: it allows for heterogeneity, unrestricted asset positions, and fully decentralized trade. I …nd that investors with higher search intensities (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold larger and more volatile inventories. Then, I use the model to study the e¤ect of trading frictions on the supply and price of liquidity. The results have policy implications concerning the Volcker rule.JEL classi…cation: G1; G11; G12; G21; D83; D53; D61 Keywords: Search frictions; Bargaining; Price dispersion; Financial intermediation Contact info: Johns Hopkins Carey Business School, 100 International Drive, Baltimore, MD 21202. Email address: semihuslu@jhu.edu. I am deeply indebted to Pierre-Olivier Weill for his supervision, his encouragement, many detailed comments, and suggestions. I also would like to thank, for fruitful discussions and comments,

Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs

“…Cimon and Garriott (2016) argue that the Volcker Rule and capital regulations motivate dealers to switch to trading in an agency basis. Uslu (2016) finds that the welfare impact of the Volcker Rule is not clear. no evidence of liquidity deterioration.…”

Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs

“…A few theoretical papers also examine the effect of regulations on market liquidity Cimon and Garriott (2016). argue that the Volcker Rule and capital regulations motivate dealers to switch to trading in an agency basis Uslu (2016). finds that the welfare impact of the Volcker Rule is not clear.…”

Mergers and Acquisitions with Private Equity Intermediation

“…PE funds in our model choose to intermediate between corporate sellers and buyers due to their moderate flow payoff. This self-selection of becoming intermediaries, albeit in different contexts, has also been posited in Neklyudov (2012), Uslu (2016), Nosal, Wong, and Wright (2016), and Farboodi, Jarosch, and Shimer (2017). In these models, it is often the case that mid-type investors, which are similar to our PE funds, choose to intermediate with comparative advantages in search skills.…”