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Over-the-Counter Markets

Darrell Duffie, Nicolae Garleanu and Lasse Pedersen

No 10816, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study how intermediation and asset prices in over-the-counter markets are affected by illiquidity associated with search and bargaining. We compute explicitly the prices at which investors trade with each other as well as marketmakers' bid and ask prices in a dynamic model with strategic agents. Bid-ask spreads are lower if investors can more easily find other investors, or have easier access to multiple marketmakers. With a monopolistic marketmaker, bid-ask spreads are higher if investors have easier access to the marketmaker. We characterize endogenous search and welfare, and discuss empirical implications.

JEL-codes: G0 G1 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-cfn and nep-fin
Note: AP
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Published as Duffie, Darrell, Nicolae Garleanu and Lasse Heje Pedersen. "Over-the-Counter Markets," Econometrica, 2005, v73(6,Nov), 1815-1848.

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Chapter: Over-The-Counter Markets (2012) Downloads
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