Template-Type: ReDIF-Paper 1.0
Author-Name: Athanasios Geromichalos
Author-Name-First: Athanasios
Author-Name-Last: Geromichalos
Author-Name: Lucas Herrenbrueck
Author-Name-First: Lucas
Author-Name-Last: Herrenbrueck
Author-Workplace-Name: Department of Economics, University of California Davis
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 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.
Length: 39
File-URL: https://repec.dss.ucdavis.edu/files/uP3hxprMSqjBdFggN2sdPfwM/16-1.pdf
File-Format: application/pdf
Number: 183
Classification-JEL: E31, E43, E52, G12
KeyWords: monetary-search models, liquidity, OTC markets, endogenous asset supply
Creation-Date: 20160524
Handle: RePEc:cda:wpaper:183