Trading and Information Diffusion in OTC Markets

68 Pages Posted: 1 Feb 2013

See all articles by Ana Babus

Ana Babus

Washington University in St. Louis - Department of Economics

Peter Kondor

London School of Economics & Political Science (LSE); Central European University (CEU)

Date Written: January 2013

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.

Keywords: bilateral trading, demand schedule equilibrium, information aggregation, networks, over-the-counter markets

JEL Classification: D82, D85, G14

Suggested Citation

Babus, Ana and Kondor, Peter and Kondor, Peter, Trading and Information Diffusion in OTC Markets (January 2013). CEPR Discussion Paper No. DP9271, Available at SSRN: https://ssrn.com/abstract=2210241

Ana Babus (Contact Author)

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States

Peter Kondor

Central European University (CEU) ( email )

Nador utca 9
Budapest, H-1051
Hungary

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://fmg.lse.ac.uk/~kondor

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