Financial Intermediation Chains in an OTC Market
67 Pages Posted: 14 Mar 2015 Last revised: 6 May 2018
Date Written: May 1, 2018
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: Suggested Citation