Over-the-Counter Marketmaking

35 Pages Posted: 11 Nov 2008

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)

Date Written: September 2003

Abstract

We study how intermediation and asset prices are affected by illiquidity associated with search and bargaining. We compute explicitly marketmakers&rsqou; bid and ask prices in a dynamic model with strategic agents. Bid-ask spreads are lower if investors can more easily find other investors or have more easy access to multiple marketmakers. This distinguishes our theory from the information-based intermediation , which implies higher spreads in connection with higher investor sophistication. With a monopolistic marketmaker, bid-ask spreads are higher if investors have easier access to the marketmaker. We discuss several empirical implications and study endogenous search and welfare.

Suggested Citation

Duffie, James Darrell and Garleanu, Nicolae Bogdan and Pedersen, Lasse Heje, Over-the-Counter Marketmaking (September 2003). NYU Working Paper No. FIN-03-043, Available at SSRN: https://ssrn.com/abstract=1299503

James Darrell Duffie (Contact Author)

Stanford University - Graduate School of Business ( email )

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Nicolae Bogdan Garleanu

University of California, Berkeley - Haas School of Business ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Lasse Heje Pedersen

AQR Capital Management, LLC ( email )

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Copenhagen Business School - Department of Finance ( email )

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Denmark

New York University (NYU) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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