Khapko, Mariana; Zoican, Marius Andrei (2017), "Smart" Settlement, SFS Cavalcade North America, 2017-05, Nashville, Canada
TypeCommunication / Conférence
External document linkhttps://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2881331
Conference titleSFS Cavalcade North America
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Abstract (EN)Blockchain technology allows for flexible settlement of trades. We build a model of intermediated trading with search frictions and counterparty risk. On the one hand, longer trade-to-settlement time increases counterparty risk exposure. On the other hand, liquidity improves since intermediaries have more time to adjust inventories. Optimal time-to-settlement decreases in counterparty risk and search intensity. However, with flexible time-to-settlement intermediaries specialize in either high- or low-default risk contracts. Consequently, price competition is relaxed. Intermediaries earn rents, increasing in their (common) default rate due to larger scope for specialization. A unique time-to-settlement for all trades in a given security improves welfare.
Subjects / KeywordsMarket design; trade settlement, blockchain; vertical differentiation; D43; D47; G10; G12
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