Endogenous intermediation in over-the-counter markets

Ana Babus and Tai-Wei Hu

Journal of Financial Economics, 2017, vol. 125, issue 1, 200-215

Abstract: We provide a theory of trading through intermediaries in over-the-counter markets. The role of intermediaries is to sustain trade. In our model, traders are connected through an informational network. Agents observe their neighbors’ actions and can trade with their counterparty in a given period through a path of intermediaries in the network. Nevertheless, agents can renege on their obligations. We show that trading through an informational network is essential to support trade when agents infrequently meet the same counteparty. However, intermediaries must receive fees to implement trades. Concentrated intermediation, as represented by a star network, is both constrained efficient and stable when agents incur linking costs. The center agent in a star can receive higher fees as well.

Keywords: Over-the-counter trading; Strategic default; Dynamic network formation (search for similar items in EconPapers)
JEL-codes: D85 G14 G21 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (25)

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Working Paper: Endogenous Intermediation in Over-the-Counter Markets (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:125:y:2017:i:1:p:200-215

DOI: 10.1016/j.jfineco.2017.04.009

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