We propose a model in which assets with identical cash flows can trade at different prices. Infinitely lived agents can establish long positions in a search spot market, or short positions by first ...borrowing an asset in a search repo market. We show that short-sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed. That asset enjoys greater liquidity, a higher lending fee ("specialness"), and trades at a premium consistent with no-arbitrage. We derive closed-form solutions for small frictions, and provide a calibration generating realistic on-the-run premia.
Abstract
We study liquidity conditions in the corporate bond market during the COVID-19 pandemic. We document that the cost of trading immediately via risky-principal trades dramatically increased at ...the height of the sell-off, forcing customers to shift toward slower agency trades. Exploiting eligibility requirements, we show that the Federal Reserve’s corporate credit facilities have had a positive effect on market liquidity. A structural estimation reveals that customers’ willingness to pay for immediacy increased by about 200 bps per dollar of transaction, but quickly subsided after the Fed announced its interventions. Dealers’ marginal cost also increased substantially but did not fully subside.
Competing for Order Flow in OTC Markets LESTER, BENJAMIN; ROCHETEAU, GUILLAUME; WEILL, PIERRE-OLIVIER
Journal of money, credit and banking,
June 2015, Letnik:
47, Številka:
S2
Journal Article
Recenzirano
We develop a model of a two-sided asset market in which trades are intermediated by dealers and are bilateral. Dealers compete to attract order flow by posting the terms at which they execute ...trades—which can include prices, quantities, and execution speed—and investors direct their orders toward dealers who offer the most attractive terms. We characterize the equilibrium in a general setting, and we illustrate theoretically and numerically how the model can account for several important trading patterns in over-the-counter markets, which do not emerge from existing models.
We extend Duffie et al.’s (2005) search-theoretic model of over-the-counter (OTC) asset markets, allowing for a decentralized inter-dealer market with arbitrary heterogeneity in dealers’ valuations ...(or, equivalently, inventory costs). We develop a solution technique that makes the model fully tractable and allows us to derive, in closed form, theoretical formulas for key statistics analysed in empirical studies of the intermediation process in OTC markets. A calibration to the market for municipal bonds allows us to quantify important unobservable characteristics of this market, including the severity of search and bargaining frictions and the nature of heterogeneity across dealers. We use our calibrated model to study the effect of these market characteristics on total welfare and the distribution of gains from trade across customers and dealers.
Incentive problems make securities’ payoffs imperfectly pledgeable, limiting agents’ ability to issue liabilities. We analyze the equilibrium consequences of such endogenous incompleteness in a ...dynamic exchange economy. Because markets are endogenously incomplete, agents have different intertemporal marginal rates of substitution, so that they value assets differently. Consequently, agents hold different portfolios. This leads to endogenous markets segmentation, which we characterize with optimal transport methods. Moreover, there is a basis going always in the same direction: the price of a security is lower than that of replicating portfolios of long positions. Finally, equilibrium expected returns are concave in factor loadings.
I review the recent literature that applies search-and-matching theory to the study of over-the-counter financial markets. I formulate and solve a simple model to illustrate the typical assumptions ...and economic forces at play in existing work. I then offer thematic tours of the literature and, in the process, discuss avenues for future research.
Various cultural intermediaries have become involved in connecting graffiti writing to the art market. Through this case study, I shed light on the division of intermediation labour in the ...commercialization process of artworks stemming from subcultures in a global art market. Since the early 1970s, an international network of cultural brokers has gradually been set up in a frontier zone between art collectors and graffiti writers. Interviews, documentary sources and participative observation as an insider made it possible to identify these intermediaries and their specific roles and resources. My investigation sheds light on three historical phases of intermediation: from the first initiatives in New York in the 1970s to thematic auctions in French between 2006 and 2017. The first two phases ended in commercial and critical failure, first in American galleries and then in European museums, but the third phase led to economic success on the secondary art market, followed by public institutions’ validation. Three types of intermediaries are distinguished: commissioned experts from graffiti subculture, who select and encourage graffiti writers to produce marketable works; entrepreneurs, who seek to create a niche in the art market and promote a flattering image of graffiti art collectors, a group to which they often also belong; established auctioneers, who mobilize influential art buyers and encourage their favourable reception of graffiti artworks in order to expand their business. Whether they collaborate or compete with each other, these cultural intermediaries have complementary roles and resources linked to their social trajectories. However, they reap unequal benefits from their activities, whose impact on subcultural practices is finally discussed.
We study the effect of releasing public information about productivity or monetary shocks using a micro-founded macroeconomic model in which agents learn from the distribution of nominal prices. ...While a public release has the direct beneficial effect of providing new information, it also has the indirect adverse effect of reducing the informational efficiency of the price system. We show that the negative indirect effect can dominate. Thus, the public information release may increase uncertainty about the monetary shock and reduce welfare. We find that the optimal communication policy is always to release either all or none of the information.
ENTRY AND EXIT IN OTC DERIVATIVES MARKETS Atkeson, Andrew G.; Eisfeldt, Andrea L.; Weill, Pierre-Olivier
Econometrica,
November 2015, Letnik:
83, Številka:
6
Journal Article
Recenzirano
We develop a parsimonious model to study the equilibrium and socially optimal decisions of banks to enter, trade in, and possibly exit, an OTC market. Although we endow all banks with the same ...trading technology, banks' optimal entry and trading decisions endogenously lead to a realistic market structure composed of dealers and customers with distinct trading patterns. We decompose banks' entry incentives into incentives to hedge risk and incentives to make intermediation profits. We show that dealer banks enter more than is socially optimal. In the face of large negative shocks, they may also exit more than is socially optimal when markets are not perfectly resilient.
Liquidity and the Threat of Fraudulent Assets Li, Yiting; Rocheteau, Guillaume; Weill, Pierre-Olivier
The Journal of political economy,
10/2012, Letnik:
120, Številka:
5
Journal Article
Recenzirano
Odprti dostop
We study an over-the-counter (OTC) market in which the usefulness of assets as a means of payment or collateral is limited by the threat of fraudulent practices. Agents can produce fraudulent assets ...at a positive cost, which generates upper bounds on the quantity of each asset that can be traded in the OTC market. Each of these endogenous, asset-specific, resalability constraints depends on the cost of fraud, on the frequency of trade, and on the asset price. In equilibrium, assets are partitioned into three liquidity tiers, which differ in their resalability, prices, haircuts, sensitivity to shocks, and responses to policies.
PDF
