Search and Endogenous Concentration of Liquidity in Asset Markets

In this paper, we develop a search-based model of asset trading. We assume that investors differ in their horizons, and can invest in two identical assets. The asset markets are partially segmented: investors can search in only one market, but can decide which one. We show that there exist a continuum of symmetric equilibria where investors are indifferent between the two markets, and a unique clientele equilibrium where short-horizon investors strictly prefer one market. This ``liquid" market has higher volume and prices, and lower search times for buyers and sellers. The clientele equilibrium generally dominates the symmetric ones, i.e., the concentration of liquidity is socially desirable. In some cases, however, the clientele equilibrium is dominated, and in these cases the entry of buyers in the liquid market is below the socially optimal level.