Financial Intermediation and the Costs of Trading in an Opaque Market

Posted: 17 Jul 2008

See all articles by Richard C. Green

Richard C. Green

Carnegie Mellon University - David A. Tepper School of Business

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business

Norman Schürhoff

University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2007

Abstract

Municipal bonds trade in opaque, decentralized broker-dealer markets in which price information is costly to gather. We analyze a database of trades between broker-dealers and customers in municipal bonds. These data were only released to the public with a lag; the market was opaque. Dealers earn lower average markups on larger trades, even though dealers bear a higher risk of losses with larger trades. We estimate a bargaining model and compute measures of dealer's bargaining power. Dealers exercise substantial market power. Our measures of market power decrease in trade size and increase in the complexity of the trade for the dealer.

JEL Classification: G0, G24

Suggested Citation

Green, Richard C. and Hollifield, Burton and Schürhoff, Norman, Financial Intermediation and the Costs of Trading in an Opaque Market (March 2007). The Review of Financial Studies, Vol. 20, Issue 2, pp. 275-314, 2007. Available at SSRN: https://ssrn.com/abstract=1161660 or http://dx.doi.org/10.1093/rfs/hhl012

Richard C. Green (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

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Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business ( email )

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(412) 268-6837 (Fax)

Norman Schürhoff

University of Lausanne ( email )

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Switzerland
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+41 (0)21 692 3435 (Fax)

Swiss Finance Institute ( email )

c/o University of Geneva
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CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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