Valuation in Over-the-Counter Markets

Posted: 26 Jun 2008

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Nicolae Gârleanu

affiliation not provided to SSRN

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: November 2007

Abstract

We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under certain conditions, illiquidity discounts are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging demand is larger. Supply shocks cause prices to jump, and then recover over time, with a time signature that is exaggerated by search frictions: The price jump is larger and the recovery is slower in less liquid markets. We discuss a variety of empirical implications.

Keywords: G1, G12, G14, D83, D4, D52

Suggested Citation

Duffie, James Darrell and Gârleanu, Nicolae and Pedersen, Lasse Heje, Valuation in Over-the-Counter Markets (November 2007). The Review of Financial Studies, Vol. 20, Issue 6, pp. 1865-1900, 2007. Available at SSRN: https://ssrn.com/abstract=1151574 or http://dx.doi.org/10.1093/rfs/hhm037

James Darrell Duffie (Contact Author)

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Nicolae Gârleanu

affiliation not provided to SSRN

No Address Available

Lasse Heje Pedersen

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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