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Frictional Intermediation in Over-the-Counter Markets

Julien Hugonnier, Benjamin Lester () and Pierre-Olivier Weill ()
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Julien Hugonnier: EPFL, Swiss Finance Institute, and CEPR.

No 19-10, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We extend Duffie, Gˆarleanu, and Pedersen’s (2005) search theoretic model of over-the-counter (OTC) asset markets, allowing for a decentralized inter-dealer market with arbitrary heterogeneity in dealers’ valuations or inventory costs. We develop a solution technique that makes the model fully tractable and allows us to derive, in closed form, theoretical formulas for key statistics analyzed in empirical studies of the intermediation process in OTC markets. A calibration to the market for municipal securities reveals that the model can generate trading patterns and prices that are quantitatively consistent with the data. We use the calibrated model to compare the gains from trade that are realized in this frictional market with those from a hypothetical, frictionless environment, and to distinguish between the quantitative implications of various types of heterogeneity across dealers.

Keywords: Over-the-counter markets; search frictions; bargaining; heterogeneous agents; intermediation (search for similar items in EconPapers)
JEL-codes: G11 G12 G21 (search for similar items in EconPapers)
Date: 2019-01-31
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Related works:
Working Paper: Frictional Intermediation in Over-the-Counter Markets (2019) Downloads
Working Paper: Frictional Intermediation in Over-the-Counter Markets (2018) Downloads
Working Paper: Frictional Intermediation in Over-the-Counter Markets (2018) Downloads
Working Paper: Frictional intermediation in over-the-counter markets (2018) Downloads
Working Paper: Frictional Intermediation in Over-the-counter Markets (2018) Downloads
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DOI: 10.21799/frbp.wp.2019.10

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