Financial Intermediation Chains in an OTC Market

66 Pages Posted: 4 Feb 2019 Last revised: 29 Apr 2020

See all articles by Ji Shen

Ji Shen

Peking University

Bin Wei

Federal Reserve Bank of Atlanta

Hongjun Yan

DePaul University

Date Written: 2018-12-01


This paper analyzes financial intermediation chains in a search model with an endogenous intermediary sector. We show that the chain length and price dispersion among interdealer trades are decreasing in search cost, search speed, and market size but increasing in investors' trading needs. Using data from the U.S. corporate bond market, we find evidence broadly consistent with these predictions. Moreover, as search speed approaches infinity, the search equilibrium does not always converge to the centralized-market equilibrium: prices and allocation converge, but the trading volume might not. Finally, we analyze the multiplicity and stability of the equilibrium.

Keywords: search, chain, financial intermediation, multiplicity, stability

JEL Classification: G10

Suggested Citation

Shen, Ji and Wei, Bin and Yan, Hongjun, Financial Intermediation Chains in an OTC Market (2018-12-01). Available at SSRN: or

Ji Shen (Contact Author)

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871

Bin Wei

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://

Hongjun Yan

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States


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