Strategic Relationships in Over-the-Counter Markets
This paper provides a theory of dynamic formation of relationships in over-the-counter markets. I show that in equilibrium markets are dealer-centric. Two forces drive the formation of networks of relationships that have a core-periphery structure. First, agents develop enduring relationships to trade risky assets over the counter against no collateral. Unsecured trading is feasible when traders are willing to incur losses in the bad states of the world, provided they are compensated sufficiently in the good states of the world. To enforce such contracts, traders rely on a network of relationships. Second, in a network, some agents may need to intermediate transactions between others and require compensation for it. This explains the emergence of a central broker-dealer that stands as counterparty for all trade.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Acharya, Viral V & Pedersen, Lasse Heje, 2004.
"Asset Pricing with Liquidity Risk,"
CEPR Discussion Papers
4718, C.E.P.R. Discussion Papers.
- Duffie, Darrell & Garleanu, Nicolae Bogdan & Pedersen, Lasse Heje, 2006.
"Valuation in Over-the-Counter Markets,"
CEPR Discussion Papers
5491, C.E.P.R. Discussion Papers.
- Nobuhiro Kiyotaki & John Moore, 1995.
NBER Working Papers
5083, National Bureau of Economic Research, Inc.
- Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
- Cocco, João F. & Gomes, Francisco J. & Martins, Nuno C., 2009. "Lending relationships in the interbank market," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 24-48, January.
- Matthew O. Jackson & Francis Bloch, 2004.
"The Formation of Networks with Transfers among Players,"
2004.80, Fondazione Eni Enrico Mattei.
- Bloch, Francis & Jackson, Matthew O., 2007. "The formation of networks with transfers among players," Journal of Economic Theory, Elsevier, vol. 133(1), pages 83-110, March.
- Bloch, Francis & Jackson, Matthew, 2004. "The Formation of Networks with Transfers among Players," Working Papers 1194, California Institute of Technology, Division of the Humanities and Social Sciences.
- Matthew O. Jackson & Asher Wolinsky, 1995.
"A Strategic Model of Social and Economic Networks,"
1098R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Franklin Allen & Ana Babus & Elena Carletti, 2010.
"Financial Connections and Systemic Risk,"
Economics Working Papers
ECO2010/30, European University Institute.
- Allen, Franklin & Babus, Ana & Carletti, Elena, 2010. "Financial Connections and Systemic Risk," Working Papers 10-20, University of Pennsylvania, Wharton School, Weiss Center.
- Franklin Allen & Ana Babus & Elena Carletti, 2010. "Financial Connections and Systemic Risk," NBER Working Papers 16177, National Bureau of Economic Research, Inc.
- Franklin Allen & Ana Babus & Elena Carletti, 2010. "Financial Connections and Systemic Risk," Economics Working Papers ECO2010/26, European University Institute.
- Vayanos, Dimitri & Wang, Tan, 2007.
"Search and endogenous concentration of liquidity in asset markets,"
Journal of Economic Theory,
Elsevier, vol. 136(1), pages 66-104, September.
- Dimitri Vayanos & Tan Wang, 2004. "Search and endogenous concentration of liquidity in asset markets," LSE Research Online Documents on Economics 455, London School of Economics and Political Science, LSE Library.
- Dmitrios Vayanos, 2004. "Search and Endogenous Concentration of Liquidity in Asset Markets," Econometric Society 2004 North American Winter Meetings 647, Econometric Society.
- Yaron Leitner, 2005. "Financial Networks: Contagion, Commitment, and Private Sector Bailouts," Journal of Finance, American Finance Association, vol. 60(6), pages 2925-2953, December.
- Upper, Christian & Worms, Andreas, 2004.
"Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?,"
European Economic Review,
Elsevier, vol. 48(4), pages 827-849, August.
- Christian Upper & Andreas Worms, 2001. "Estimating bilateral exposures in the German interbank market: is there a danger of contagion?," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 211-229 Bank for International Settlements.
- Upper, Christian & Worms, Andreas, 2002. "Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?," Discussion Paper Series 1: Economic Studies 2002,09, Deutsche Bundesbank, Research Centre.
- Ozsoylev, Han N. & Walden, Johan, 2011. "Asset pricing in large information networks," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2252-2280.
- Kandori, Michihiro, 1992.
"Social Norms and Community Enforcement,"
Review of Economic Studies,
Wiley Blackwell, vol. 59(1), pages 63-80, January.
- Jonathan Levin, 2000.
"Relational Incentive Contracts,"
01002, Stanford University, Department of Economics.
- Antonio Mele, 2008.
"Information Linkages and Correlated Trading,"
FMG Discussion Papers
dp620, Financial Markets Group.
- Allen, F. & Babus, A. & Carletti, E., 2010. "Financial Connections and Systemic Risk," Discussion Paper 2010-88S, Tilburg University, Center for Economic Research.
- Dan Bernhardt & Vladimir Dvoracek & Eric Hughson & Ingrid M. Werner, 2005. "Why Do Larger Orders Receive Discounts on the London Stock Exchange?," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1343-1368.
- Goyal, Sanjeev & Vega-Redondo, Fernando, 2007. "Structural holes in social networks," Journal of Economic Theory, Elsevier, vol. 137(1), pages 460-492, November.
- Bhaskar Dutta & Sayantan Ghosal & Debraj Ray, 2004.
"Farsighted Network Formation,"
122, Centre for Development Economics, Delhi School of Economics.
When requesting a correction, please mention this item's handle: RePEc:red:sed011:1405. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.