EconPapers    
Economics at your fingertips  
 

Trading and information diffusion in OTC markets

Ana Babus and Péter Kondor ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We propose a model of trade in over-the-counter (OTC) markets in which each dealer with private information can engage in bilateral transactions with other dealers, as determined by her links in a network. Each dealer's strategy is represented as a quantity-price schedule. We analyze the effect of trade decentralization and adverse selection on information diffusion, expected profits, trading costs and welfare. Information diffusion through prices is not affected by dealers' strategic trading motives, and there is an informational externality that constrains the informativeness of prices. Trade decentralization can both increase or decrease welfare. A dealer's trading cost is driven by both her own and her counterparties' centrality. Central dealers tend to learn more, trade more at lower costs and earn higher expected profit

Keywords: information aggregation; bilateral trading; demand schedule equilibrium; trading networks. (search for similar items in EconPapers)
JEL-codes: D82 D85 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-mic and nep-mst
Date: 2018-09-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Published in Econometrica, 1, September, 2018, 86(5), pp. 1727-1769. ISSN: 0012-9682

Downloads: (external link)
http://eprints.lse.ac.uk/88050/ Open access version. (application/pdf)

Related works:
Working Paper: Trading and information diffusion in OTC markets (2013) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:88050

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().

 
Page updated 2019-04-02
Handle: RePEc:ehl:lserod:88050