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The Market for OTC Derivatives

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  • Atkeson, Andrew
  • Eisfeldt, Andrea L.
  • Weill, Pierre-Olivier

Abstract

We develop a model of equilibrium entry, trade, and price formation in over-the-counter (OTC) markets. Banks trade derivatives to share an aggregate risk subject to two trading frictions: they must pay a fixed entry cost, and they must limit the size of the positions taken by their traders because of risk-management concerns. Although all banks in our model are endowed with access to the same trading technology, some large banks endogenously arise as "dealers,'' trading mainly to provide intermediation services, while medium sized banks endogenously participate as ``customers'' mainly to share risks. We use the model to address positive questions regarding the growth in OTC markets as trading frictions decline, and normative questions of how regulation of entry impacts welfare.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9403.

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Date of creation: Mar 2013
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Handle: RePEc:cpr:ceprdp:9403

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Keywords: credit default swaps; dealers; OTC markets;

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  1. Bruno Strulovici & Darrell Duffie, 2009. "Capital Mobility and Asset Pricing," 2009 Meeting Papers 87, Society for Economic Dynamics.
  2. Darrell Duffie & Semyon Malamud & Gustavo Manso, 2009. "Information Percolation With Equilibrium Search Dynamics," Econometrica, Econometric Society, vol. 77(5), pages 1513-1574, 09.
  3. Sergio Mayordomo & Juan Ignacio Peña Sánchez de Rivera & Eduardo S. Schwartz, 2010. "Are all Credit Default Swap databases equal?," Business Economics Working Papers wb104621, Universidad Carlos III, Departamento de Economía de la Empresa.
  4. Peter Kondor & Ana Babus, 2013. "Trading and Information Diffusion in Over-the-Counter Markets," 2013 Meeting Papers 792, Society for Economic Dynamics.
  5. Gara M. Afonso, 2008. "Liquidity and congestion," Staff Reports 349, Federal Reserve Bank of New York.
  6. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
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