Comparing Search and Intermediation Frictions across Markets

71 Pages Posted: 13 May 2022

See all articles by Gabor Pinter

Gabor Pinter

Bank of England

Semih Uslu

Johns Hopkins University - Carey Business School

Multiple version iconThere are 2 versions of this paper

Date Written: April 14, 2022

Abstract

In intermediated markets, trading takes time and intermediaries extract rents. We estimate a structural search‑and‑bargaining model to quantify these trading delays, intermediaries’ ability to extract rents, and the resulting welfare losses in government and corporate bond markets. Using transaction‑level data from the UK, we identify a set of clients who are active in both markets. We exploit the cross-market variation in the distributions of these clients’ trading frequency, prices, and trade sizes to estimate our structural model. We find that trading delays and dealers’ market power both play a crucial role in explaining the differences in liquidity across the two markets. Dealers’ market power is more severe in the government bond market, while trading delays are more severe in the corporate bond market. We find that the welfare loss from frictions in the government and corporate bond markets are 7.8% and 12.2%, respectively, and our decomposition implies that this loss is almost exclusively caused by trading delays in the corporate bond market, while trading delays and dealers’ market power split the welfare loss equally in the government bond market. Using data from the Covid‑19 crisis period, we also find that these welfare losses might more than triple during turbulent times, revealing the fragility of the over‑the‑counter market structure.

Keywords: Search frictions, market power, government bonds, corporate bonds, OTC markets

JEL Classification: D40, G10, G11, L10

Suggested Citation

Pinter, Gabor and Uslu, Semih, Comparing Search and Intermediation Frictions across Markets (April 14, 2022). Bank of England Working Paper No. 974, 2022, Available at SSRN: https://ssrn.com/abstract=4106482 or http://dx.doi.org/10.2139/ssrn.4106482

Gabor Pinter (Contact Author)

Bank of England ( email )

Semih Uslu

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
410-234-9237 (Phone)

HOME PAGE: http://www.semihuslu.info

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