How Does Information Affect Liquidity in Over-the-Counter Markets?

Michael Lee and Antoine Martin

No 20200113, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: A large volume of financial transactions occur in decentralized markets that commonly depend on a network of dealers. Dealers face two impediments to providing liquidity in these markets. First, dealers may face informed traders. Second, they may face costs associated with maintaining large balance sheets, either due to inventory or liquidity costs. In a recent paper, we study a model of over-the-counter (OTC) markets in which liquidity is endogenously determined by dealers who must contend with both asymmetric information and liquidity costs. This post provides an intuitive explanation of our model and the dynamics of interdealer liquidity.

Keywords: Liquidity; information; inter-dealer (search for similar items in EconPapers)
JEL-codes: G1 G14 (search for similar items in EconPapers)
Date: 2020-01-13
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-mst
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