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Entry and Exit in OTC Derivatives Markets

Listed author(s):
  • Andrew G. Atkeson
  • Andrea L. Eisfeldt
  • Pierre-Olivier Weill

We develop a parsimonious model to study the equilibrium and socially optimal decisions of banks to enter, trade in, and possibly exit, an OTC market. Although we endow all banks with the same trading technology, banks’ optimal entry and trading decisions endogenously lead to a realistic market structure comprised of dealers and customers with distinct trading patterns. We decompose banks’ entry incentives into incentives to hedge risk and incentives to make intermediation profits. We show that dealer banks enter more than is socially optimal. In the face of large negative shocks, they may also exit more than is socially optimal when markets are not perfectly resilient.

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File URL: http://www.nber.org/papers/w20416.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20416.

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Date of creation: Aug 2014
Publication status: published as Andrew G. Atkeson & Andrea L. Eisfeldt & Pierre‐Olivier Weill, 2015. "Entry and Exit in OTC Derivatives Markets," Econometrica, Econometric Society, vol. 83, pages 2231-2292, November.
Handle: RePEc:nbr:nberwo:20416
Note: AP CF EFG ME
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  1. Afonso, Gara, 2011. "Liquidity and congestion," Journal of Financial Intermediation, Elsevier, vol. 20(3), pages 324-360, July.
  2. Alessandro Gavazza, 2016. "An Empirical Equilibrium Model of a Decentralized Asset Market," Econometrica, Econometric Society, vol. 84, pages 1755-1798, September.
  3. Emiliano Pagnotta & Thomas Philippon, 2011. "Competing on Speed," NBER Working Papers 17652, National Bureau of Economic Research, Inc.
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