Information Disclosure in Dynamic OTC Markets

93 Pages Posted: 14 Aug 2018 Last revised: 18 Aug 2018

See all articles by Ali Kakhbod

Ali Kakhbod

Massachusetts Institute of Technology (MIT) - Department of Economics

Fei Song

Massachusetts Institute of Technology (MIT), Department of Economics

Date Written: August 1, 2018

Abstract

This paper studies how mandatory transparency (through TRACE), along with long term incentive of informed dealers, affect market price informativeness, liquidity and welfare in dynamic over-the-counter (OTC) markets. We show public disclosure of additional information about past trades, paradoxically, makes the markets more opaque, by reducing market price informativeness. Thus, surprisingly, the transparency requirements of the U.S. Dodd-Frank Act may make the markets more opaque. However, this market opacity creates liquidity and increases welfare. To enhance financial transparency via improving price informativeness as well as market liquidity and welfare, an effective way is to randomly audit dealers.

Keywords: Information Disclosure, OTC market, Dynamic trading, Market efficiency, Regime-switching fundamentals, Incentive

JEL Classification: G14, G18, D83, G01

Suggested Citation

Kakhbod, Ali and Song, Fei, Information Disclosure in Dynamic OTC Markets (August 1, 2018). Available at SSRN: https://ssrn.com/abstract=3111018 or http://dx.doi.org/10.2139/ssrn.3111018

Ali Kakhbod (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Fei Song

Massachusetts Institute of Technology (MIT), Department of Economics ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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