To pool or not to pool? Security design in OTC markets

Vincent Glode, Christian Opp and Ruslan Sverchkov

Journal of Financial Economics, 2022, vol. 145, issue 2, 508-526

Abstract: We study security issuers’ decisions on whether to pool assets when facing counterparties endowed with market power, as is common in over-the-counter markets. Our analysis reveals how buyers’ market power may render the pooling of assets suboptimal — both privately and socially — in particular, when the potential gains from trade are large. Pooling assets then reduces the elasticity of trade volume in the relevant part of the payoff distribution, exacerbating the inefficient rationing associated with the exercise of buyers’ market power. Our analysis provides insight on the determinants of asset-backed securities issuance, including regulatory reforms affecting financial institutions’ liquidity.

Keywords: Pooling; Adverse selection; Imperfect competition; Decentralized markets (search for similar items in EconPapers)
JEL-codes: D82 G32 L14 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Working Paper: To Pool or Not to Pool? Security Design in OTC Markets (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:145:y:2022:i:2:p:508-526

DOI: 10.1016/j.jfineco.2021.09.021

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