Heterogeneous beliefs in over-the-counter markets
journal contributionposted on 28.07.2014, 12:56 by Marc De Kamps, Daniel Ladley, Aistis Simaitis
The behavior and stability of over-the-counter markets is of central concern to regulators. Little is known, however, about how the structure of these markets determine their properties. In this paper we consider an over-the-counter market populated by boundedly rational heterogeneous traders in which the structure is represented by a network. Stability is found to decrease as the market becomes less well connected, however, the configuration of connections has a significant effect. The presence of hubs, such as those found in scale free networks increases stability and decreases volatility whilst small-world short-cut links have the opposite effect. Volatility in the fundamental value increases market volatility, however, volatility in the riskless asset returns has an ambiguous effect.