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Search in Illiquid Markets

Abstract

As stated in the previous Chapter, the necessity to search for a trading partner seems to be the key factor in understanding liquidity. It directly affects the possibility of quick liquidation at a reasonable price but is difficult to specify in a way that would allow its inclusion in the investment decision process. This Chapter concentrates on the formal description of the search process. A sequential search model has been chosen for this purpose. The function of the model is twofold: on the one hand, it should allow the quantification of the influence of various market parameters on the final result of liquidation; on the other hand, it should provide methods for analyzing various search strategies and identifying the optimal one. However, these two issues cannot be entirely separated — the effect of the market situation on the outcome of search depends on the chosen search strategy, and the optimal strategy is to a large extent determined by the characteristics of assets and markets. Thus, the central issue of the analysis is the dependence between the liquidity of an asset and the strategic choice of an investor.

Keywords

Real Estate Reservation Price Search Cost Search Problem Listing Price 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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