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Trading and information diffusion in OTC markets

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  • Babus, Ana
  • Kondor, Péter

Abstract

We model trading and information diffusion in OTC markets, when dealers can engage in many bilateral transactions at the same time. We show that information diffusion is effective, but not efficient. While each bilateral price partially reveals all dealers' private information after a single round of trading, dealers could learn more even within the constraints imposed by our environment. This is not a result of dealers' market power, but arises from the interaction between decentralization and differences in dealers' valuation of the asset. We apply our framework to confront several explanations for the disruption of OTC markets with stylized facts from the empirical literature. We find more support for narratives emphasizing increased counterparty risk as opposed to increased informational frictions.

Suggested Citation

  • Babus, Ana & Kondor, Péter, 2013. "Trading and information diffusion in OTC markets," CEPR Discussion Papers 9271, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9271
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Shen, Ji & Wei, Bin & Yan, Hongjun, 2016. "Financial Intermediation Chains in an OTC Market," MPRA Paper 74925, University Library of Munich, Germany.
    2. Blasques, Francisco & Bräuning, Falk & Lelyveld, Iman van, 2018. "A dynamic network model of the unsecured interbank lending market," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 310-342.
    3. Richard Lowery & Tim Landvoigt, 2016. "Financial Industry Dynamics," 2016 Meeting Papers 1248, Society for Economic Dynamics.
    4. repec:fip:fedreq:00061 is not listed on IDEAS
    5. Julien Hugonnier & Benjamin Lester & Pierre-Olivier Weill, 2014. "Heterogeneity in Decentralized Asset Markets," NBER Working Papers 20746, National Bureau of Economic Research, Inc.
    6. Havran, Dániel & Erb, Tamás, 2015. "Mit veszítünk a piaci súrlódásokkal?. A pénzügyi piacok mikrostruktúrája
      [Trading mechanisms and market frictions. Microstructure of the financial markets]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(3), pages 229-262.
    7. Gino Cenedese & Angelo Ranaldo & Michalis Vasios, 2018. "OTC Premia," Working Papers on Finance 1818, University of St. Gallen, School of Finance, revised Dec 2018.
    8. Clerc, L. & Gabrieli, S. & Kern, S. & El Omari, Y., 2014. "Monitoring the European CDS Market through Networks: Implications for Contagion Risks," Working papers 477, Banque de France.
    9. Alvarez, Fernando & Barlevy, Gadi, 2014. "Mandatory Disclosure and Financial Contagion," Working Paper Series WP-2014-4, Federal Reserve Bank of Chicago.
    10. Julien Hugonnier & Benjamin Lester & Pierre-Olivier Weill, 2018. "Frictional Intermediation in Over-the-counter Markets," NBER Working Papers 24956, National Bureau of Economic Research, Inc.
    11. Uslu, Semih, 2015. "Pricing and Liquidity in Decentralized Asset Markets," MPRA Paper 73901, University Library of Munich, Germany, revised 21 Sep 2016.
    12. repec:oup:jeurec:v:15:y:2017:i:4:p:784-817. is not listed on IDEAS
    13. Kok, Christoffer & Hałaj, Grzegorz, 2014. "Modeling emergence of the interbank networks," Working Paper Series 1646, European Central Bank.
    14. Syngjoo Choi & Andrea Galeotti & Sanjeev Goyal, 2017. "Trading in Networks: Theory and Experiments," Journal of the European Economic Association, European Economic Association, vol. 15(4), pages 784-817.

    More about this item

    Keywords

    bilateral trading; demand schedule equilibrium; information aggregation; networks; over-the-counter markets;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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