Entry and Exit in OTC Derivatives Markets

105 Pages Posted: 7 Oct 2018

See all articles by Andrea L. Eisfeldt

Andrea L. Eisfeldt

UCLA Anderson School of Management

Andrew Atkeson

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER)

Pierre-Olivier Weill

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

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Date Written: June 14, 2016

Abstract

We develop a parsimonious model to study the equilibrium and socially optimal decisions of banks to enter, trade in, and possibly exit, an OTC market. Although we endow all banks with the same trading technology, banks’ optimal entry and trading decisions endogenously lead to a realistic market structure composed of dealers and customers with distinct trading patterns. We decompose banks’ entry incentives into incentives to hedge risk and incentives to make intermediation profits. We show that dealer banks enter more than is socially optimal. In the face of large negative shocks, they may also exit more than is socially optimal when markets are not perfectly resilient.

Keywords: OTC Markets, Derivatives, Search, Entry and Exit

Suggested Citation

Eisfeldt, Andrea L. and Atkeson, Andrew G. and Weill, Pierre-Olivier, Entry and Exit in OTC Derivatives Markets (June 14, 2016). Econometrica, Vol. 83, No. 6, 2015, Available at SSRN: https://ssrn.com/abstract=3249608

Andrea L. Eisfeldt (Contact Author)

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://https://sites.google.com/site/andrealeisfeldt/

Andrew G. Atkeson

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pierre-Olivier Weill

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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