Finding a Good Price in Opaque Over-the-Counter Markets
Massachusetts Institute of Technology (MIT) - Sloan School of Management
October 31, 2011
Review of Financial Studies, Forthcoming
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
Date posted: November 7, 2009 ; Last revised: November 7, 2011
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