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Evolutionary Choice of Markets


Gerber, Anke; Bettzüge, Marc Oliver (2005). Evolutionary Choice of Markets. Working paper series / Institute for Empirical Research in Economics No. 109, University of Zurich.

Abstract

We consider an economy where a finite set of agents can trade on one of two asset markets. Due to endogenous participation the differ in the liquidity they provide. Traders have idiosyncratic preferencesnfor the markets, e.g. due to differential time preferences for maturity dates of futures contracts. For a broad range of parameters we find that nontrade, trade on both markets (individualization) as well as trade on one market only (standardization) is supported by a Nash equilibrium. Byncontrast, whenever the number of traders becomes large, the evolutionary process selects a unique stochastically stable state which corresponds tonthe equilibrium with two active markets and coincides with the welfare maximizing market structure.

Abstract

We consider an economy where a finite set of agents can trade on one of two asset markets. Due to endogenous participation the differ in the liquidity they provide. Traders have idiosyncratic preferencesnfor the markets, e.g. due to differential time preferences for maturity dates of futures contracts. For a broad range of parameters we find that nontrade, trade on both markets (individualization) as well as trade on one market only (standardization) is supported by a Nash equilibrium. Byncontrast, whenever the number of traders becomes large, the evolutionary process selects a unique stochastically stable state which corresponds tonthe equilibrium with two active markets and coincides with the welfare maximizing market structure.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:April 2005
Deposited On:29 Nov 2011 21:25
Last Modified:12 Aug 2017 12:52
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html

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