Finding a Good Price in Opaque Over-the-Counter Markets

Zhu, Haoxiang

doi:10.2139/ssrn.1500809

Abstract

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Finding a Good Price in Opaque Over-the-Counter Markets

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management

October 31, 2011

Review of Financial Studies, Forthcoming

Abstract:
This paper offers a dynamic model of opaque over-the-counter markets. A seller searches for an attractive price by visiting multiple buyers, one at a time. The buyers do not observe contacts, quotes, or trades elsewhere in the market. A repeat contact with a buyer reveals the seller's reduced outside options and worsens the price offered by the revisited buyer. When the asset value is uncertain and common to all buyers, a visit by the seller suggests that other buyers could have quoted unattractive prices and thus worsens the visited buyer's inference regarding the asset value.

Number of Pages in PDF File: 38

Keywords: over-the-counter market, search, adverse selection, market breakdown, fragmentation, outside options, bargaining

JEL Classification: G14, C78, D82, D83

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Date posted: November 7, 2009 ; Last revised: November 7, 2011

Suggested Citation

Zhu, Haoxiang, Finding a Good Price in Opaque Over-the-Counter Markets (October 31, 2011). Review of Financial Studies, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1500809 or http://dx.doi.org/10.2139/ssrn.1500809

Contact Information

Haoxiang Zhu (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

50 MEMORIAL DRIVE
Cambridge, MA 02142-1347
United States

HOME PAGE: http://www.mit.edu/~zhuh