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The Market for OTC Derivatives


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


We develop a model of equilibrium entry, trade, and price formation in over-the- counter (OTC) markets. Banks trade derivatives to share an aggregate risk subject to two trading frictions: they must pay a fixed entry cost, and they must limit the size of the positions taken by their traders because of risk-management concerns. Although all banks in our model are endowed with access to the same trading technology, some large banks endogenously arise as "dealers," trading mainly to provide intermediation services, while medium sized banks endogenously participate as "customers" mainly to share risks. We use the model to address positive questions regarding the growth in OTC markets as trading frictions decline, and normative questions of how regulation of entry impacts welfare.

Suggested Citation

  • Andrew G. Atkeson & Andrea L. Eisfeldt & Pierre-Olivier Weill, 2013. "The Market for OTC Derivatives," NBER Working Papers 18912, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18912
    Note: AP EFG ME

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    References listed on IDEAS

    1. Ana Babus & Péter Kondor, 2012. "Trading and Information Diffusion in Over-the-Counter Markets," CEU Working Papers 2012_19, Department of Economics, Central European University, revised 09 Dec 2012.
    2. Afonso, Gara, 2011. "Liquidity and congestion," Journal of Financial Intermediation, Elsevier, vol. 20(3), pages 324-360, July.
    3. Darrell Duffie & Semyon Malamud & Gustavo Manso, 2009. "Information Percolation With Equilibrium Search Dynamics," Econometrica, Econometric Society, vol. 77(5), pages 1513-1574, September.
    4. Arora, Navneet & Gandhi, Priyank & Longstaff, Francis A., 2012. "Counterparty credit risk and the credit default swap market," Journal of Financial Economics, Elsevier, vol. 103(2), pages 280-293.
    5. Darrell Duffie & Bruno Strulovici, 2012. "Capital Mobility and Asset Pricing," Econometrica, Econometric Society, vol. 80(6), pages 2469-2509, November.
    6. Peña Sánchez de Rivera, Juan Ignacio & Mayordomo, Sergio & Schwartz, Eduardo S., 2010. "Are all Credit Default Swap databases equal?," DEE - Working Papers. Business Economics. WB wb104621, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    7. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    8. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
    9. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-132, March.
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    Cited by:

    1. repec:eee:jfinec:v:127:y:2018:i:2:p:342-365 is not listed on IDEAS
    2. Vuillemey, G. & Breton, R., 2014. "Endogenous Derivative Networks," Working papers 483, Banque de France.
    3. Maryam Farboodi, 2014. "Intermediation and Voluntary Exposure to Counterparty Risk," 2014 Meeting Papers 365, Society for Economic Dynamics.
    4. Manjunath, Vikram, 2016. "Fractional matching markets," Games and Economic Behavior, Elsevier, vol. 100(C), pages 321-336.
    5. Michail Anthropelos & Scott Robertson & Konstantinos Spiliopoulos, 2015. "The pricing of contingent claims and optimal positions in asymptotically complete markets," Papers 1509.06210,, revised Sep 2016.
    6. Stephens, Eric & Thompson, James R., 2017. "Information asymmetry and risk transfer markets," Journal of Financial Intermediation, Elsevier, vol. 32(C), pages 88-99.
    7. repec:eee:finmar:v:35:y:2017:i:c:p:21-46 is not listed on IDEAS
    8. Marco D'Errico & Tarik Roukny, 2017. "Compressing Over-the-Counter Markets," Papers 1705.07155,
    9. Marco D’Errico & Tarik Roukny, 2017. "Compressing over-the-counter markets," ESRB Working Paper Series 44, European Systemic Risk Board.

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G0 - Financial Economics - - General

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