Trading and information diffusion in OTC markets

Péter Kondor and Ana Babus

No 9271, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We model trading and information diffusion in OTC markets, when dealers can engage in many bilateral transactions at the same time. We show that information diffusion is effective, but not efficient. While each bilateral price partially reveals all dealers' private information after a single round of trading, dealers could learn more even within the constraints imposed by our environment. This is not a result of dealers' market power, but arises from the interaction between decentralization and differences in dealers' valuation of the asset. We apply our framework to confront several explanations for the disruption of OTC markets with stylized facts from the empirical literature. We find more support for narratives emphasizing increased counterparty risk as opposed to increased informational frictions.

Keywords: Bilateral trading; Demand schedule equilibrium; Information aggregation; Networks; Over-the-counter markets (search for similar items in EconPapers)
JEL-codes: D82 D85 G14 (search for similar items in EconPapers)
Date: 2013-01
New Economics Papers: this item is included in nep-cta
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Citations: View citations in EconPapers (21)

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Working Paper: Trading and information diffusion in OTC markets (2018)
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