Bargaining in small dynamic markets

Bargaining in dynamic markets

Article history: Received 15 June 2015 Available online 21 March 2017 JEL classification: C78 D40

Valuation in Dynamic Bargaining Markets

We study the impact on asset prices of illiquidity associated with search and bargaining in an economy in which agents can trade only when they find each other. Marketmakers’ prices are higher and bidask spreads are lower if investors can find each other more easily. Prices become Walrasian as investors’ or marketmakers’ search intensities get large. Endogenizing search intensities yields natur...

Liquidity premia in dynamic bargaining markets

This paper develops a search-theoretic model of the cross-sectional distribution of asset returns, abstracting from risk premia and focusing exclusively on liquidity. I derive a float-adjusted return model (FARM), explaining the pricing of liquidity with a simple linear formula: In equilibrium, the liquidity spread of an asset is proportional to the inverse of its free float, the portion of its...

Matching and bargaining models of markets: approximating small markets by large markets

We show that the equilibrium of a matching and bargaining model of a market in which there is a ®nite number of agents at each date need not be near the equilibrium of a market with a continuum of agents, although matching probabilities are the same in both markets. Holding the matching process ®xed, as the ®nite market becomes large its equilibrium approaches the equilibrium of its continuum l...

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