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

55 Pages Posted: 4 Mar 2020 Last revised: 22 Feb 2021

See all articles by Lerby Murat Ergun

Lerby Murat Ergun

Bank of Canada; London School of Economics & Political Science (LSE)

Andreas Uthemann

Bank of Canada; London School of Economics - Systemic Risk Centre

Date Written: January 1, 2021

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

Suggested Citation

Ergun, Lerby Murat and Uthemann, Andreas, Strategic Uncertainty in Financial Markets: Evidence from a Consensus Pricing Service (January 1, 2021). Available at SSRN: https://ssrn.com/abstract=3533518 or http://dx.doi.org/10.2139/ssrn.3533518

Lerby Murat Ergun

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Andreas Uthemann (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

London School of Economics - Systemic Risk Centre ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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