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Intermediation in Over-the-Counter Markets with Price Transparency

Author

Listed:
  • Miroslav Gabrovski

    () (University of Hawaii at Manoa)

  • Ioannis Kospentaris

    () (Department of Economics, University of Hawaii at Manoa, USA and University of Hawaii Economic Research Organization (UHERO), University of Hawaii at Manoa, USA)

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 also explore the sorting implications of the equilibrium pattern of trade and show that it is constrained efficient.

Suggested Citation

  • Miroslav Gabrovski & Ioannis Kospentaris, 2020. "Intermediation in Over-the-Counter Markets with Price Transparency," Working Papers 202017, University of Hawaii at Manoa, Department of Economics.
  • Handle: RePEc:hai:wpaper:202017
    as

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    File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_20-17.pdf
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    References listed on IDEAS

    as
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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.

    More about this item

    Keywords

    Over-the-Counter Markets; Search Frictions; Intermediation; Price Transparency; Competitive Search; Sorting;

    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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