Valuation in Over-the-Counter Markets

Duffie, Darrell; Garleanu, Nicolae; Pedersen, Lasse Heje

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Valuation in Over-the-Counter Markets

CEPR Discussion Paper No. 5491

48 Pages Posted: 19 May 2006

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Nicolae Garleanu

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

There are 2 versions of this paper

Date Written: February 2006

Abstract

We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under certain conditions, illiquidity discounts are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging demand are larger. Supply shocks cause prices to jump, and then 'recover' over time, with a time signature that is exaggerated by search frictions. We discuss a variety of empirical implications.

Keywords: Search, bargaining, liquidity, risk, asset pricing

JEL Classification: G12

Suggested Citation: Suggested Citation

Duffie, James Darrell and Garleanu, Nicolae Bogdan and Pedersen, Lasse Heje, Valuation in Over-the-Counter Markets (February 2006). CEPR Discussion Paper No. 5491, Available at SSRN: https://ssrn.com/abstract=903398