Finding a Good Price in Opaque Over-the-Counter Markets
Review of Financial Studies, Forthcoming
38 Pages Posted: 7 Nov 2009 Last revised: 7 Nov 2011
Date Written: October 31, 2011
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.
Keywords: over-the-counter market, search, adverse selection, market breakdown, fragmentation, outside options, bargaining
JEL Classification: G14, C78, D82, D83
Suggested Citation: Suggested Citation