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Valuation in Over-the-Counter Markets

Darrell Duffie, Nicolae Bogdan Garleanu and Lasse Pedersen

No 5491, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under certain conditions, illiquidity discounts are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging demand are larger. Supply shocks cause prices to jump, and then 'recover' over time, with a time signature that is exaggerated by search frictions. We discuss a variety of empirical implications.

Keywords: asset pricing; bargaining; liquidity; risk; search (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2006-02
New Economics Papers: this item is included in nep-fin and nep-fmk
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