Financial Intermediation Chains in an OTC Market

67 Pages Posted: 14 Mar 2015 Last revised: 6 May 2018

See all articles by Ji Shen

Ji Shen

London School of Economics & Political Science (LSE)

Bin Wei

Federal Reserve Bank of Atlanta

Hongjun Yan

DePaul University

Date Written: May 1, 2018

Abstract

This paper analyzes financial intermediation chains in a search model with an endogenous intermediary sector. We show that the chain length and price dispersion among inter-dealer trades are decreasing in search cost, search speed, and market size, but increasing in investors' trading needs. Using data from the U.S. corporate bond market, we find evidence broadly consistent with these predictions. Moreover, as search speed approaches infinity, the search equilibrium does not always converge to the centralized-market equilibrium: prices and allocation converge, but the trading volume may not. Finally, the multiplicity and stability of the equilibrium is analyzed.

Keywords: Search, Chain, Financial Intermediation, Multiplicity, Stability.

JEL Classification: G10

Suggested Citation

Shen, Ji and Wei, Bin and Yan, Hongjun, Financial Intermediation Chains in an OTC Market (May 1, 2018). Available at SSRN: https://ssrn.com/abstract=2577497 or http://dx.doi.org/10.2139/ssrn.2577497

Ji Shen

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Bin Wei

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/wei-bin.aspx

Hongjun Yan (Contact Author)

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/view/hongjunyan

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