An Experimental Evaluation of the Over-the-Counter Search Model

Oleg Korenok, Ioannis Kospentaris and John Lightle ()
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John Lightle: Department of Economics, VCU School of Business

No 2401, Working Papers from VCU School of Business, Department of Economics

Abstract: Most financial trade occurs in decentralized over the counter (OTC) markets which are plagued by frictions. The pioneering theoretical work of Duffie, Garleanu, and Pedersen (2005) uses search theory to model these frictions and study price formation in OTC asset markets. In this paper, we conduct the first experimental evaluation of the main prediction of their model. As predicted, we find that when the asset is plentiful, prices are lower when traders have more meeting opportunities, while when the asset is in short supply, prices are higher when traders have more meeting opportunities. We also find that, contrary to the theory, meetings between traders often do not result in successful transactions and that these trade failures create additional frictions affecting asset prices.

Keywords: Search frictions; over-the-counter market; experimental asset market (search for similar items in EconPapers)
JEL-codes: C78 D83 G12 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2024-01
New Economics Papers: this item is included in nep-exp
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Persistent link: https://EconPapers.repec.org/RePEc:vcu:wpaper:2401

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