Title: The Strategic Determination of the Supply of Liquid Assets
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 even modest 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.
Publication Year: 2016
Publication Date: 2016-05-18
Language: en
Type: preprint
Access and Citation
Cited By Count: 7
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