Over-the-Counter Markets for Non-Standardized Assets
71 Pages Posted: 27 Feb 2015 Last revised: 3 Aug 2021
Date Written: July 31, 2021
Over-the-counter trades often involve non-standardized assets, such as municipal/corporate bonds, derivatives, real estate, and structured products. I study a dynamic equilibrium model of over-the-counter markets with both stochastic search delays and bargaining delays arising from imperfect asset standardization. Two types of delays have opposite effects on the variety of traded assets implying that greater asset standardization but also greater market opacity improve market liquidity. Broker-dealers who intermediate bargaining and have the commitment power to terminate negotiations can improve efficiency even when they do not provide immediacy to investors.
Keywords: over-the-counter markets, search friction, bargaining delay, standardized assets, broker-dealers
JEL Classification: G1, D82, C78
Suggested Citation: Suggested Citation