nep-mst New Economics Papers
on Market Microstructure
Issue of 2022‒10‒03
two papers chosen by
Thanos Verousis

  1. Bargaining in Small Dynamic Markets By Francesc Dilmé
  2. Activist Manipulation Dynamics By Doruk Cetemen; Gonzalo Cisternas; Aaron Kolb; S Viswanathan

  1. By: Francesc Dilmé (University of Bonn)
    Abstract: This paper studies trade in endogenously evolving markets exhibiting few traders at any given point in time. Traders arrive in the market and bargain until they complete a trade. We find that, unlike large markets, small markets feature trade delay and price dispersion, even when sellers and buyers are homogeneous and matching frictions are small. We characterize transaction prices as a function of the endogenous evolution of the market composition and economic conditions, providing several novel comparative statics results. Our analysis highlights the need to incorporate sub-market structures into the theoretical study of job, real estate, and rental markets, where trade opportunities are typically constrained by both the geographical location and individual characteristics of each trader.
    Keywords: Small dynamic markets, decentralized bargaining, trade delay.
    JEL: C73 C78 D53 G12
    Date: 2022–08
  2. By: Doruk Cetemen; Gonzalo Cisternas; Aaron Kolb; S Viswanathan
    Abstract: Two activists with correlated private positions in a firm’s stock, trade sequentially before simultaneously exerting effort that determines the firm’s value. We document the existence of a novel linear equilibrium in which an activist’s trades have positive sensitivity to her block size, but such orders are not zero on average: the leader activist manipulates the price to induce the follower to acquire a larger position and thus add more value. We examine the implications of this equilibrium for market outcomes and discuss its connection with the prominent phenomenon of “wolf-pack” activism—multiple hedge funds engaging in parallel with a target firm. We also explore the possibility of other equilibria where the activists trade against their initial positions.
    Keywords: activism; insider trading; noisy signaling; price manipulation; hedge funds
    JEL: D82 G14 G23
    Date: 2022–09–01

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