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Trading and Information Diffusion in Over-the-Counter Markets

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  • Peter Kondor

    (Central European University)

  • Ana Babus

    (Imperial College London)

Abstract

We model trading and information diffusion in OTC markets, when dealers can engage in many bilateral transactions at the same time. We show that information diffusion is effective, but not efficient. While each bilateral price partially reveals all dealers' private information after a single round of trading, dealers could learn more even within the constraints imposed by our environment. This is not a result of dealers' market power, but arises from the interaction between decentralization and differences in dealers' valuation of the asset. We apply our framework to confront several explanations for the disruption of OTC markets with stylized facts from the empirical literature. We find more support for narratives emphasizing increased counterparty risk as opposed to increased informational frictions.

Suggested Citation

  • Peter Kondor & Ana Babus, 2013. "Trading and Information Diffusion in Over-the-Counter Markets," 2013 Meeting Papers 792, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:792
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    References listed on IDEAS

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