Signaling in Over-the-Counter Markets: Benefits and Costs of Transparency
40 Pages Posted: 13 Nov 2017
Date Written: November 10, 2017
We provide a theoretical rationale for dealer objections to ex-post transparency in corporate bond and other OTC markets: Disclosure of the terms of a transaction conveys information possessed by the dealer about the asset quality and reduces the dealer’s rents when she disposes of the inventory in a second transaction. We show that costly signaling in a transparent market benefits investors through lower spreads and higher volume. Dealers may also gain from transparency despite lower spreads when potential gains from trade are small or adverse selection is high, because in those circumstances higher volume offsets smaller spreads for dealer profits.
Keywords: OTC markets, Transparency, Signaling
JEL Classification: G14, D82, D83
Suggested Citation: Suggested Citation