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Entry and Exit in OTC Derivatives Markets

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

Abstract

We develop a parsimonious model to study the equilibrium and socially optimal decisions of banks to enter, trade in, and possibly exit, an OTC market. Although we endow all banks with the same trading technology, banks’ optimal entry and trading decisions endogenously lead to a realistic market structure comprised of dealers and customers with distinct trading patterns. We decompose banks’ entry incentives into incentives to hedge risk and incentives to make intermediation profits. We show that dealer banks enter more than is socially optimal. In the face of large negative shocks, they may also exit more than is socially optimal when markets are not perfectly resilient.

Suggested Citation

  • Andrew G. Atkeson & Andrea L. Eisfeldt & Pierre-Olivier Weill, 2014. "Entry and Exit in OTC Derivatives Markets," NBER Working Papers 20416, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20416
    Note: AP CF EFG ME
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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