Valuation in Over-the-Counter Markets

39 Pages Posted: 12 Nov 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: March 2004

Abstract

We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under natural conditions, prices are lower and illiquidity discounts 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 are larger. If agents face risk limits, then higher volatility leads to greater difficulty locating unconstrained buyers, resulting in lower prices. Information can fail to be revealed through trading when search is difficult. We discuss a variety of financial applications and testable implications.

Suggested Citation

Duffie, James Darrell and Gârleanu, Nicolae and Pedersen, Lasse Heje, Valuation in Over-the-Counter Markets (March 2004). NYU Working Paper No. S-MF-04-04. Available at SSRN: https://ssrn.com/abstract=1300195

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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Cambridge, MA 02138
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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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