Over-the-Counter Markets

49 Pages Posted: 19 Oct 2004 Last revised: 23 Jul 2022

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: October 2004

Abstract

We study how intermediation and asset prices in over-the-counter markets are affected by illiquidity associated with search and bargaining. We compute explicitly the prices at which investors trade with each other as well as marketmakers' 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 easier access to multiple marketmakers. With a monopolistic marketmaker, bid-ask spreads are higher if investors have easier access to the marketmaker. We characterize endogenous search and welfare, and discuss empirical implications.

Suggested Citation

Duffie, James Darrell and Garleanu, Nicolae Bogdan and Pedersen, Lasse Heje, Over-the-Counter Markets (October 2004). NBER Working Paper No. w10816, Available at SSRN: https://ssrn.com/abstract=601118

James Darrell Duffie (Contact Author)

Stanford University - Graduate School of Business ( email )

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Nicolae Bogdan Garleanu

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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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New York University (NYU) ( email )

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