Search in Over-the-Counter Markets

Abstract

In a tractable model of over-the-counter markets where each investor can arbitrarily distribute her search capacity across other investors, the holdings of an asset are endogenously concentrated among a subgroup of investors. Investors who are more likely to hold the asset search among those less likely to hold it, and vice versa. When directed search is allowed in those existing random search models that endogenize intermediation, intermediation ceases to be an equilibrium outcome and instead the concentration of asset holdings arises endogenously. My model explains the persistent imbalance between banks’ funding needs, and contributes novel predictions of asset concentration across investors and asymmetric price dispersion.

Keywords: Over-the-counter, search friction, directed search, random search, asset concentration, intermediation

JEL Classification: D83, D85