Decentralized Exchange†

Decentralized Exchange† AbstractMost assets are traded in multiple interconnected trading venues. This paper develops an equilibrium model of decentralized markets that accommodates general market structures with coexisting exchanges. Decentralized markets can allocate risk among traders with different risk preferences more efficiently, thus realizing gains from trade that cannot be reproduced in centralized markets. Market decentralization always increases price impact. Yet, markets in which assets are traded in multiple exchanges, whether they are disjoint or intermediated, can give higher welfare than the centralized market with the same traders and assets. In decentralized markets, demand substitutability across assets is endogenous and heterogeneous among traders. (JEL D43, D44, D85, G11, G12) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Decentralized Exchange†

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Publisher
American Economic Association
Copyright
Copyright © 2017 © American Economic Association
ISSN
0002-8282
D.O.I.
10.1257/aer.20140759
Publisher site
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Abstract

AbstractMost assets are traded in multiple interconnected trading venues. This paper develops an equilibrium model of decentralized markets that accommodates general market structures with coexisting exchanges. Decentralized markets can allocate risk among traders with different risk preferences more efficiently, thus realizing gains from trade that cannot be reproduced in centralized markets. Market decentralization always increases price impact. Yet, markets in which assets are traded in multiple exchanges, whether they are disjoint or intermediated, can give higher welfare than the centralized market with the same traders and assets. In decentralized markets, demand substitutability across assets is endogenous and heterogeneous among traders. (JEL D43, D44, D85, G11, G12)

Journal

American Economic ReviewAmerican Economic Association

Published: Nov 1, 2017

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