Over-the-Counter Markets

Abstract

We study how intermediation and asset prices in over-the-counter markets are affected by illiquidity associated with search and bargaining. We compute explicitly the prices at which investors trade with each other, as well as marketmakers' bid and ask prices, in a dynamic model with strategic agents. Bid-ask spreads are lower if investors can more easily find other investors or have easier access to multiple marketmakers. With a monopolistic marketmaker, bid-ask spreads are higher if investors have easier access to the marketmaker. We characterize endogenous search and welfare, and discuss empirical implications. Copyright The Econometric Society 2005.

Trading Credit Default Swaps via Interdealer Brokers

“…However, the additional services provided by today's brokerage firms are not reflected in his analysis. Even in recent comprehensive studies on trading in OTC markets, such as Duffie et al (2005), the brokerage function is not addressed. But because of the additional services offered by brokerage firms, the dealers may be willing to pay the extra spread.…”

Partial differential equation models in macroeconomics

“…Ideas similar to those presented in this section in the context of search and knowledge diffusion have been applied to different contexts. For example, Duffie et al [53] and Lagos & Rocheteau [54] and others use search theory to model the trading frictions that are characteristic of over-thecounter markets, and to examine the effects of these frictions on asset prices and trading volumes. A mathematical analysis of a similar model is provided by Gomes & Ribeiro [55].…”

Steady states in matching and bargaining

“…The steady state assumption is ubiquitous in matching and bargaining models with heterogeneous agents and search frictions [1,2,3,4,5,6,7,10,11,12]. From an applied perspective, steady states provide a natural description of markets in which the relevant variables are stable over time.…”