Valuation in Over-the-Counter Markets
We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under certain conditions, illiquidity discounts are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging demand are larger. Supply shocks cause prices to jump, and then "recover" over time, with a time signature that is exaggerated by search frictions. We discuss a variety of empirical implications.
|Date of creation:||Feb 2006|
|Publication status:||published as Duffie, Darrell, Nicolae Garleanu, and Lasse Heje Pedersen. "Valuation in Over-the-Counter Markets." Review of Financial Studies 20, 5 (2007): 1865-1900.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Acharya, Viral V. & Pedersen, Lasse Heje, 2005.
"Asset pricing with liquidity risk,"
Journal of Financial Economics,
Elsevier, vol. 77(2), pages 375-410, August.
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