Benchmarks in Search Markets

Duffie, Darrell; Dworczak, Piotr; Zhu, Haoxiang

doi:10.3386/w20620

Cited by 44 publications

(39 citation statements)

References 18 publications

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“…In our setting, past trades in related assets play the role of benchmarks. As in Duffie et al (2014), we find that more transparent markets can yield higher welfare by reducing information asymmetries among markets participants (e.g., dealers, traders). However, we also show that the effect of transparency on welfare can be non-monotonic.…”

Section: Related Literaturementioning

confidence: 60%

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Information Spillovers in Asset Markets with Correlated Values

2015

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We study the effect of information spillovers and transparency in a dynamic setting with adverse selection and correlated asset values. A trade (or lack thereof) by one seller can provide information about the quality of other assets in the market. In equilibrium, the information content of this trading behavior is endogenously determined. We show that this endogeneity of information leads to multiple equilibria when the correlation between asset values is sufficiently high. That is, if buyers expect "bad" assets to trade quickly, then a seller with a bad asset has reason to be concerned about negative information being revealed, which induces her to trade quickly. Conversely, if buyers do not expect bad assets to trade quickly, then the seller has less to be concerned about and is more willing to wait. We study the implications for policies that target market transparency.We show that total welfare is higher when markets are fully transparent than when the market is fully opaque. However, both welfare and trading activity can decrease in the degree of market transparency. * Affiliation: CREi, Universitat Pompeu Fabra, and Barcelona GSE.

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Section: Related Literaturementioning

confidence: 60%

“…In contemporaneous work, Duffie et al (2014) analyze the role of published benchmarks (e.g. LIBOR), which reveal such "common" states, in facilitating trade and efficiency in OTC markets.…”

Section: Related Literaturementioning

confidence: 99%

Information Spillovers in Asset Markets with Correlated Values

2015

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“…Daley and Green (), Cespa and Vives (), Duffie et al . () and Fuchs et al . (), study exogenous signals.…”

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confidence: 85%

Learning from Trades

Mauring

2017

The Economic Journal

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I study stationary cut-off-strategy equilibria of a dynamic market model where buyers sample sellers sequentially from an unknown distribution. Buyers learn about the distribution from the sampled sellers and a 'trade signal'. The trade signal reveals whether a randomly chosen seller traded yesterday. Observing a trade (as opposed to no trade) is good news about the distribution. Buyers who observe a trade use a higher cut-off than buyers who observe no trade, despite buyers' learning from sampled sellers that puts a countervailing pressure on the cut-offs. The trade signal may reduce market efficiency, while an appropriate exogenous signal increases efficiency.

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“…Duffie, Dworczak, and Zhu () analyze the use of benchmarks in over‐the‐counter markets. They demonstrate that benchmarks can lower search costs, increase trading volume, and generate more efficient trade matching between dealers and investors.…”

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confidence: 99%

Liquidity in a Market for Unique Assets: Specified Pool and To‐Be‐Announced Trading in the Mortgage‐Backed Securities Market

Gao¹,

Schultz²,

Song³

2017

The Journal of Finance

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Agency mortgage-backed securities (MBS) trade simultaneously in a market for specified pools (SPs) and in the to-be-announced (TBA) forward market. TBA trading creates liquidity by allowing thousands of different MBS to be traded in a handful of TBA contracts. SPs that are eligible to be traded as TBAs have significantly lower trading costs than other SPs. We present evidence that TBA eligibility, in addition to characteristics of TBA-eligible SPs, lowers trading costs. We show that dealers hedge SP inventory with TBA trades, and they are more likely to prearrange trades in SPs that are difficult to hedge. THE MARKET FOR AGENCY MORTGAGE-BACKED securities (MBS) is among the largest, most active, and most liquid of all securities markets. At first glance, the market's liquidity is surprising because each MBS is unique and is composed of specific mortgages with their own prepayment characteristics. In this paper, we study the institutional feature of this market that allows it to work so well, namely, parallel trading in a to-be-announced (TBA) forward market in MBS and a specified pool (SP) market in which specific MBS are traded.TBA trading makes the agency MBS market liquid in three ways. First, the TBA market takes thin markets for thousands of different MBS with different prepayment characteristics and trades them through a handful of thickly traded cheapest-to-deliver contracts. In this way, liquidity is increased for the MBS that are traded there instead of as SPs. Second, eligibility for TBA

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Benchmarks in Search Markets

Cited by 44 publications

References 18 publications

Information Spillovers in Asset Markets with Correlated Values

Information Spillovers in Asset Markets with Correlated Values

Learning from Trades

Liquidity in a Market for Unique Assets: Specified Pool and To‐Be‐Announced Trading in the Mortgage‐Backed Securities Market

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