FIN-01-022

Valuation in Dynamic Bargaining Markets

September 24, 2001

Darrell Duffie, Nicolae Garleanu and Lasse Heje Pedersen

ABSTRACT

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 bid-ask 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 natural welfare implications. Information can fail to be revealed through trading when search is difficult.


Darrell Duffie
Institution: Graduate School of Business, Stanford University, Stanford, CA 94305-5015
Telephone: 650 723 1976
Email: duffie@stanford.edu

Nicolae Garleanu
Institution: Graduate School of Business, Stanford University, Stanford, CA 94305-5015
Telephone: 650 725 7270
Email: ngarlea@leland.stanford.edu

Lasse Heje Pedersen
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0359
Fax: (212) 995-4233
Email: lpederse@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~lpederse

To download a copy of this paper click here
To request a copy of this paper click here

The Finance Department Working Paper Series has been generously sponsored by