To Pool or Not to Pool? Security Design in OTC Markets

37 Pages Posted: 21 Nov 2016 Last revised: 3 Dec 2019

See all articles by Vincent Glode

Vincent Glode

University of Pennsylvania - The Wharton School

Christian C. Opp

University of Rochester - Simon Business School

Ruslan Sverchkov

University of Pennsylvania - The Wharton School

Date Written: November 27, 2019

Abstract

We study the decision to pool assets for a privately informed issuer attempting to sell securities to liquidity suppliers endowed with market power, as is often the case in over-the-counter markets. Contrary to what has been shown for competitive markets, issuing debt on a pool of assets becomes suboptimal in our environment when the potential gains from trade are large. In those cases, selling assets separately reduces the inefficient rationing that is typical in environments with market power. Our results can shed light on recently observed time-variation in the prevalence of pooling in financial markets.

Keywords: Pooling, Security Design, Liquidity, Adverse Selection, Imperfect Competition, OTC Markets

JEL Classification: D82, G32, L14

Suggested Citation

Glode, Vincent and Opp, Christian C. and Sverchkov, Ruslan, To Pool or Not to Pool? Security Design in OTC Markets (November 27, 2019). Available at SSRN: https://ssrn.com/abstract=2871374 or http://dx.doi.org/10.2139/ssrn.2871374

Vincent Glode (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Christian C. Opp

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Ruslan Sverchkov

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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