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An Experimental Evaluation of the Over-the-Counter Search Model

Author

Listed:
  • Oleg Korenok

    (Department of Economics, VCU School of Business)

  • Ioannis Kospentaris

    (Department of Economics, Athens University of Economics and Business)

  • John Lightle

    (Department of Economics, VCU School of Business)

Abstract

Most financial trade occurs in decentralized over the counter (OTC) markets which are plagued by frictions. The pioneering theoretical work of Duffie, Garleanu, and Pedersen (2005) uses search theory to model these frictions and study price formation in OTC asset markets. In this paper, we conduct the first experimental evaluation of the main prediction of their model. As predicted, we find that when the asset is plentiful, prices are lower when traders have more meeting opportunities, while when the asset is in short supply, prices are higher when traders have more meeting opportunities. We also find that, contrary to the theory, meetings between traders often do not result in successful transactions and that these trade failures create additional frictions affecting asset prices.

Suggested Citation

  • Oleg Korenok & Ioannis Kospentaris & John Lightle, 2024. "An Experimental Evaluation of the Over-the-Counter Search Model," Working Papers 2401, VCU School of Business, Department of Economics.
    • Handle: RePEc:vcu:wpaper:2401
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    More about this item

    Keywords

    Search frictions; over-the-counter market; experimental asset market;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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