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Frictional Intermediation in Over-the-Counter Markets

Julien Hugonnier, Benjamin Lester () and Pierre-Olivier Weill ()
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Julien Hugonnier: Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

No 18-59, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We extend Duffie, Garleanu, and Pedersen’s (2005) search-theoretic model of over-the-counter asset markets, allowing for a decentralized inter-dealer market with arbitrary heterogeneity in dealers’ valuations or inventory costs. We develop a solution technique that makes the model fully tractable and allows us to derive, in closed form, theoretical formulas for key statistics analyzed in empirical studies of the intermediation process in OTC market. A calibration to the market for municipal securities reveals that the model can generate trading patterns and prices that are quantitatively consistent with the data. We use the calibrated model to compare the gains from trade that are realized in this frictional market with those from a hypothetical, frictionless environment, and to distinguish between the quantitative implications of various types of heterogeneity across dealers.

Keywords: Over-the-Counter Markets; Search Frictions; Bargaining; Heterogeneous Agents; Intermediation (search for similar items in EconPapers)
JEL-codes: G11 G12 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: 2018-08
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Related works:
Working Paper: Frictional Intermediation in Over-the-Counter Markets (2019) Downloads
Working Paper: Frictional Intermediation in Over-the-Counter Markets (2019) Downloads
Working Paper: Frictional Intermediation in Over-the-Counter Markets (2018) Downloads
Working Paper: Frictional intermediation in over-the-counter markets (2018) Downloads
Working Paper: Frictional Intermediation in Over-the-counter Markets (2018) Downloads
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