Strategic Uncertainty in Financial Markets: Evidence from a Consensus Pricing Service

Abstract

This paper develops a framework to measure strategic uncertainty based on the structural estimation a model of learning from prices. We apply this framework to measure intermediaries' uncertainty about competitors' valuations in an over-the-counter (OTC) market. The analysis employs a novel dataset of price estimates that dealer banks, highly sophisticated market participants, provide to the main consensus pricing service in the OTC derivatives market. Consensus pricing services are a popular information aggregation mechanism in OTC markets to anonymously share and aggregate price information among market participants. We show how this price information impacts dealer banks' strategic uncertainty. We also measure how efficiently these prices aggregate dispersed information. We find that the consensus prices mainly help dealer banks to reduce strategic uncertainty rather than inform them about asset values. The results stress the importance of publicly available price data for creating a shared understanding of market conditions in opaque market structures.

Keywords: OTC markets, Information Aggregation, Social Learning, Strategic Uncertainty, Consensus Pricing, Benchmarks

JEL Classification: C58, D53, D83, G12, G14