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

36 Pages Posted: 21 Nov 2016 Last revised: 6 Jan 2022

See all articles by Vincent Glode

Vincent Glode

University of Pennsylvania - The Wharton School; University of Pennsylvania - Finance Department

Christian C. Opp

University of Rochester - Simon Business School; National Bureau of Economic Research (NBER)

Ruslan Sverchkov

University of Warwick - Warwick Business School

Date Written: September 23, 2021

Abstract

We study security issuers' decisions on whether to pool assets when facing counterparties endowed with market power, as is common in over-the-counter markets. Our analysis reveals how buyers' market power may render the pooling of assets suboptimal --- both privately and socially --- in particular, when the potential gains from trade are large. Pooling assets then reduces the elasticity of trade volume in the relevant part of the payoff distribution, exacerbating the inefficient rationing associated with the exercise of buyers' market power. Our analysis provides insight on the determinants of asset-backed securities issuance, including regulatory reforms affecting financial institutions' liquidity.

Keywords: Pooling; Adverse selection; Imperfect competition; Decentralized markets

JEL Classification: D82, G32, L14

Suggested Citation

Glode, Vincent and Glode, Vincent and Opp, Christian C. and Sverchkov, Ruslan, To Pool or Not to Pool? Security Design in OTC Markets (September 23, 2021). Journal of Financial Economics (JFE), Forthcoming, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , 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

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Christian C. Opp

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ruslan Sverchkov

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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