OTC Discount

68 Pages Posted: 8 Dec 2020 Last revised: 8 Oct 2021

See all articles by Calebe de Roure

Calebe de Roure

Reserve Bank of Australia

Emanuel Moench

Frankfurt School of Finance and Management

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration

Michael Schneider

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: September 9, 2021

Abstract

We document a sizable OTC discount in the interdealer market for German sovereign bonds where exchange and over-the-counter trading coexist: the vast ma- jority of OTC prices are favorable compared to exchange quotes. This is a challenge for theories of OTC markets centered around search-and-bargaining frictions but consistent with models of hybrid markets based on information frictions. We find sup- port for this explanation. Distinguishing between bilateral and broker-intermediated OTC trades, differences in OTC discount across protocols are consistent with their relative informedness. Within each protocol, the difference in OTC discount is explained not only by information but also by search-and-bargaining frictions.

Keywords: Market Microstructure, Hybrid Markets, Venue Choice, Interdealer Brokerage, Fixed-Income, OTC Markets, Search Frictions, Information Frictions

JEL Classification: D4, D47, G1, G14, G24

Suggested Citation

de Roure, Calebe and Moench, Emanuel and Pelizzon, Loriana and Schneider, Michael, OTC Discount (September 9, 2021). SAFE Working Paper No. 298, Available at SSRN: https://ssrn.com/abstract=3744758 or http://dx.doi.org/10.2139/ssrn.3744758

Calebe De Roure

Reserve Bank of Australia ( email )

65, Martin Place
Sydney, NSW 2000
Australia

Emanuel Moench

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Michael Schneider

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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