Over-the-Counter Markets for Non-Standardized Assets

Abstract

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