A time to give and a time to receive: Role switching and generalized exchange in a financial market

Abstract

We study the effect of generalized exchange as a possible mechanism reproducing the flows of resources among participants in financial markets. In an analysis of on-line trading in a major European interbank market for liquidity, we find that generalized exchange is unlikely to affect sequences of short-term market transactions, but it emerges forcefully in the longer-term. This empirical result is consistent with our predictions that generalized exchange may be understood only with reference to the temporal micro-structure of transactions linking occupants of market roles (“buyers” and “sellers,” in our case). We also find that generalized exchange does not affect larger market transactions in the shorter-term, and is unlikely to emerge in the longer-term. This result is consistent with our prediction that generalized exchange does not operate as a stabilizing mechanism for asymmetric market transactions when they involve higher levels of risk. The results of the study clarify how and when context-specific differences in time and value of transactions trigger (or inhibit) generic network mechanisms in decentralized systems of exchange like, for example, markets.