Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/173662
Authors: 
Geromichalos, Athanasios
Herrenbrueck, Lucas
Year of Publication: 
2016
Series/Report no.: 
Working Paper No. 16-1
Abstract: 
We study how the strategic interaction of liquid-asset suppliers depends on the financial market conditions that determine asset liquidity. In our model, two asset suppliers try to profit from the liquidity services their assets confer. Asset liquidity is indirect in the sense that assets can be sold for money in over-the-counter (OTC) secondary markets. These secondary markets are segmented and customers will be drawn to the market where they expect to find the best terms. Understanding this, asset-suppliers play a differentiated Cournot game, where product differentiation here stems from differences in OTC microstructure. We find that small differences in OTC microstructure can induce very large differences in the relative liquidity of two assets. Asset demand curves can slope upward for evenmodest degrees of increasing returns in the matching technology. And if one asset supplier has an exogenous advantage over another, the favored agent may want to strategically increase asset supply for the purpose of driving competitors out of the secondary market altogether.
Subjects: 
monetary-search models
liquidity
OTC markets
endogenous asset supply
JEL: 
E31
E43
E52
G12
Document Type: 
Working Paper

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