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; tradingnetworks. (search for similar items in EconPapers)
JEL-codes: D82 D85 G14 (search for similar items in EconPapers)
Date: 2018-09-01
New Economics Papers: this item is included in nep-fmk, nep-mic and nep-mst
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Citations: View citations in EconPapers (10)

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

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

Related works:
Working Paper: Trading and information diffusion in OTC markets (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:88050

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