Working Paper: NBER ID: w28729
Authors: Ana Babus; Cecilia Parlatore
Abstract: We study the determinants of asset market fragmentation in a model with strategic investors that disagree about the value of an asset. Investors' choices determine the market structure. Fragmented markets are supported in equilibrium when disagreement between investors is low. In this case, investors take the same side of the market and are willing to trade in smaller markets with a higher price impact to face less competition when trading against a dealer. The maximum degree of market fragmentation increases as investors' priors are more correlated. Dealers can benefit from fragmentation, but investors are always better off in centralized markets.
Keywords: No keywords provided
JEL Codes: D43; D47; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low disagreement among investors (G40) | market fragmentation (F12) |
| correlated priors about asset value (G19) | low disagreement among investors (G40) |
| market fragmentation (F12) | reduced gains from trading with dealer (F11) |
| highly correlated investor priors (G40) | maximum degree of market fragmentation (F12) |
| low disagreement among investors (G40) | centralized markets (D40) |