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Entry and Exit in OTC Derivatives Markets

Andrew Atkeson, Andrea Eisfeldt and Pierre-Olivier Weill

No 20416, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a parsimonious model to study the equilibrium and socially optimal decisions of banks to enter, trade in, and possibly exit, an OTC market. Although we endow all banks with the same trading technology, banks’ optimal entry and trading decisions endogenously lead to a realistic market structure comprised of dealers and customers with distinct trading patterns. We decompose banks’ entry incentives into incentives to hedge risk and incentives to make intermediation profits. We show that dealer banks enter more than is socially optimal. In the face of large negative shocks, they may also exit more than is socially optimal when markets are not perfectly resilient.

JEL-codes: G0 G1 G2 (search for similar items in EconPapers)
Date: 2014-08
New Economics Papers: this item is included in nep-ban
Note: AP CF EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as Andrew G. Atkeson & Andrea L. Eisfeldt & Pierre‐Olivier Weill, 2015. "Entry and Exit in OTC Derivatives Markets," Econometrica, Econometric Society, vol. 83, pages 2231-2292, November.

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