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Intermediation in over-the-counter markets with price transparency

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  • Gabrovski, Miroslav
  • Kospentaris, Ioannis

Abstract

A salient feature of over-the-counter (OTC) markets is intermediation: dealers buy from and sell to customers as well as other dealers. Traditionally, the search-theoretic literature of OTC markets has rationalized this as a consequence of random meetings and ex post bargaining between investors. We show that neither of these are necessary conditions for intermediation. We build a model of a fully decentralized OTC market in which search is directed and sellers post prices ex ante. Intermediation arises naturally as an equilibrium outcome for a broad class of matching functions commonly used in the literature. We further explore, both analytically and numerically, how the extent of intermediation depends on the nature of frictions and model primitives. Our numerical exercises also contrast the model's equilibrium implications to those of a benchmark model with random meetings and ex post bargaining.

Suggested Citation

  • Gabrovski, Miroslav & Kospentaris, Ioannis, 2021. "Intermediation in over-the-counter markets with price transparency," Journal of Economic Theory, Elsevier, vol. 198(C).
  • Handle: RePEc:eee:jetheo:v:198:y:2021:i:c:s0022053121001812
    DOI: 10.1016/j.jet.2021.105364
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    Cited by:

    1. Pierre-Olivier Weill, 2020. "The search theory of OTC markets," NBER Working Papers 27354, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Over-the-counter markets; Search frictions; Intermediation; Price transparency; Competitive search; Sorting;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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