Signaling in Over-the-Counter Markets: Benefits and Costs of Transparency

40 Pages Posted: 13 Nov 2017

See all articles by Kerry Back

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business

Ruomeng Liu

University of Nebraska at Lincoln

Alberto Teguia

Rice University, Jesse H. Jones Graduate School of Business, Students

Multiple version iconThere are 2 versions of this paper

Date Written: November 10, 2017

Abstract

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

Back, Kerry and Liu, Ruomeng and Teguia, Alberto, Signaling in Over-the-Counter Markets: Benefits and Costs of Transparency (November 10, 2017). Available at SSRN: https://ssrn.com/abstract=3068930 or http://dx.doi.org/10.2139/ssrn.3068930

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Ruomeng Liu (Contact Author)

University of Nebraska at Lincoln ( email )

Lincoln, NE 68588
United States

Alberto Teguia

Rice University, Jesse H. Jones Graduate School of Business, Students ( email )

Houston, TX
United States

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