Frictional Intermediation in Over-the-Counter Markets

81 Pages Posted: 27 Aug 2018 Last revised: 18 Jan 2019

See all articles by Julien Hugonnier

Julien Hugonnier

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Benjamin R. Lester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Pierre-Olivier Weill

University of California, Los Angeles; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: August 1, 2018

Abstract

We extend Duffie, Garleanu, and Pedersen’s (2005) search-theoretic model of over-the-counter asset markets, allowing for a decentralized inter-dealer market with arbitrary heterogeneity in dealers’ valuations or inventory costs. We develop a solution technique that makes the model fully tractable and allows us to derive, in closed form, theoretical formulas for key statistics analyzed in empirical studies of the intermediation process in OTC market. A calibration to the market for municipal securities reveals that the model can generate trading patterns and prices that are quantitatively consistent with the data. We use the calibrated model to compare the gains from trade that are realized in this frictional market with those from a hypothetical, frictionless environment, and to distinguish between the quantitative implications of various types of heterogeneity across dealers.

Keywords: Over-the-Counter Markets, Search Frictions, Bargaining, Heterogeneous Agents, Intermediation

JEL Classification: G11, G12, G21

Suggested Citation

Hugonnier, Julien and Lester, Benjamin R. and Weill, Pierre-Olivier, Frictional Intermediation in Over-the-Counter Markets (August 1, 2018). Swiss Finance Institute Research Paper No. 18-59, Available at SSRN: https://ssrn.com/abstract=3232220 or http://dx.doi.org/10.2139/ssrn.3232220

Julien Hugonnier

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL Dorigny
Extranef
Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/hugonnier

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Benjamin R. Lester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

HOME PAGE: http://sites.google.com/site/benjaminrlester

Pierre-Olivier Weill (Contact Author)

University of California, Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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