Author: Ana Babus
Publisher:
ISBN:
Category : Over-the-counter markets
Languages : en
Pages : 66

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Author: Ana Babus
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Author: Wei Li
Publisher:
ISBN:
Category :
Languages : en
Pages : 51

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Book Description
We model the role of dealers in information diffusion in over-the-counter (OTC) markets. A dealer maintains relationships with a network of both informed customers who trade to profit from private information pertaining to asset values and risk-averse liquidity customers who trade to meet idiosyncratic liquidity needs. In our model, the dealer knows the type of every customer in her relationship network, so she can play the role of an information intermediary who at first willingly loses to informed customers to learn information from them and then relays that information to risk-averse liquidity customers for profits. We characterize the effects of a dealer's profit-driven choice of informativeness on liquidity trading and informational efficiency. We also study how dealer size affects bid-ask spreads and trading volume as well as how public information affects a dealer's choice of informativeness.

Author: Zhuo Zhong
Publisher:
ISBN:
Category :
Languages : en
Pages : 181

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This dissertation consists of three essays studying on over-the-counter trading (OTC henceforth). In Chapter 1, I model the formation of the inter-dealer network in an OTC market, and study how the network affects prices and volumes in the market. The model explains the empirically observed core-periphery network with dealers' capacity of providing liquidity. Specifically, dealers with large capacity comprise the core of the network, connecting them to all other dealers, while dealers who have small capacity operate at the periphery. In addition, my model matches the empirical finding on the negative relation between markups and order sizes. Furthermore, I show that there may be structural breaks in this negative relationship as variations in order sizes may alter the inter-dealer network. These results suggest that empirical studies on OTC markets should control for the stability of an inter-dealer network to avoid model misspecification. Chapter 2 evaluates how a centralized market could provide an incentive for OTC dealers to reduce opacity in trading. In this chapter, opacity is modeled as Knightian uncertainty faced by investors. I find that while a competitive centralized market provides an incentive for dealers to reduce opacity in an OTC market, a noncompetitive centralized market does the opposite. Competition between the competitive centralized market and the OTC market forces dealers in the latter to reduce opacity. With the noncompetitive centralized market, opportunities for collusion provide an incentive for dealers to increase opacity. Dealers do not have the incentive to reduce opacity in this case. In Chapter 3, we test the model implications in Chapter 2 with an empirical study on the corporate bond markets, and find consistent results. We find that transaction costs of bonds traded only in OTC markets are significantly different from (10 basis points larger than) bonds traded both in OTC markets and the NYSE market. Since the latter contains pre-trade information from the NYSE market, this finding suggests that pre-trade transparency reduces bonds' trading costs. This result implies that pre-trade transparency benefits investors but hurts dealers, as the major part of dealers' profits comes from investors' trading costs. We also find that pre-trade transparency increases bonds' values. Bonds with the NYSE pre-trade transparency have significantly lower bond yields than bonds without the pre-trade transparency. Our findings are robust to endogeneity of firms' bond listing decisions on the NYSE.

Author: Ji Hee Yoon
Publisher:
ISBN:
Category :
Languages : en
Pages : 202

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I study the design of markets and the performance of various trading mechanisms with respect to efficiency and information aggregation. Endogenous Market Structure: Over-the-Counter versus Exchange Trading For many assets, traders favor either over-the-counter (OTC) or centralized markets. This paper examines how traders' choices between these trading venues depend on asset and trader characteristics. A trader's incentive to choose an OTC market depends on the benefit of learning his asset value and the cost due to price impacts. Traders choose OTC markets over centralized exchanges when the asset values are heterogeneously interdependent and traders' private information is sufficiently inaccurate. Market structures are endogenously determined by traders' individual market choices. This paper provides comparative statics of equilibrium market structures. The OTC and centralized market coexist only when traders are asymmetric. Furthermore, the OTC market decreases information efficiency by being conducive to trade only between informed traders. Uncontingent Trading and Exchange Design (with M. Rostek) In many markets, a trader's demand for each asset is contingent on the price of that asset alone rather than on the price of all assets he trades. This paper examines a uniform-price double auction with arbitrary restrictions on cross-asset conditioning, including contingent demand schedules (demands for each asset condition on the price vector) and uncontingent schedules (demand of each asset conditions on the price of that asset). In contrast to markets with contingent schedules, a trader optimizes with respect to a directional derivative rather than asset-by-asset. A trader's best response itself is determined by a fixed point between his first-order condition and the directional derivative. We characterize equilibrium in markets with limited cross-asset conditioning and examine the welfare effects of conditioning restrictions. If suitably designed, markets with limited demand conditioning are always at least as efficient as markets with contingent demands. Creating multiple exchanges for the same assets is generally not redundant for welfare even if all traders participate in all exchanges. Inference Design (with M. Rostek) This paper examines how market design can be used to induce the desired informational properties of prices and accomplish revenue or efficiency objectives. A model of double auction with quasilinear-quadratic utilities is introduced that allows for arbitrary Gaussian information structures, and in particular allows for heterogeneity in interdependence of trader values. With heterogeneous interdependence, some traders learn more from prices whereas others from private signals; thus, centralized market clearing can isolate informed trading from uninformed trading (learning from signals versus learning from prices). Changes in the information structure can enhance both learning from prices and private signals for all traders; changes that lower price informativeness for some market participants may improve the price informativeness of other agents. We characterize conditions on the information structure for price and signal inference to involve no tradeoff.

Author: Ana Babus
Publisher:
ISBN:
Category : Intermediation (Finance)
Languages : en
Pages : 55

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Book Description
We provide a theory of trading through intermediaries in OTC markets. The role of intermediaries is to sustain unsecured trade. When agents trade without collateral, total surplus can increase. In our model, traders are connected through a network. Agents observe their neighbors' actions, and can trade with their counterparty in a given period through a path of intermediaries in the network. If trade is unsecured, agents can renege on their obligations. We show that trading through a network is essential to support unsecured trade, when agents infrequently meet the same counterparty in the market. However, intermediaries must receive fees to have the incentive to implement unsecured trades. While trade without collateral can be sustained in many networks, the efficiency gains are higher in a star network. The center agent in a star can receive higher fees as well. Moreover, concentrated intermediation is a stable structure, when agents incur linking costs.

Author: Yilin Wang
Publisher:
ISBN:
Category :
Languages : en
Pages : 179

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Book Description
My thesis consists of three chapters on information economics and financial economics. Chapter 1: Many decentralized over-the-counter (OTC) markets have recently become subject to new regulations requiring transparency. I build up an information model that features bilateral trade in a double auction, endogenous public signal, and inter-dealer network formation to study the effect of TRACE on the inter-dealer markets. In the trading stage, I study the private information diffusion process and endogenize the public information contained in the disseminated trading price. I show that in markets with a relatively low degree of information asymmetry, post-trade transparency makes the adverse selection more severe and reduces the surplus from asset reallocation between dealers, and thus hurts the inter-dealer network formation. Investors are more likely to be symmetrically uninformed about thinly traded bonds. The empirical results provide evidence that TRACE has a significant negative effect on the inter-dealer trading frequency for thinly traded bonds. Chapter 2 (with Kim-Sau Chung): During currency crises, large traders once simultaneously short the asset markets and currency market. We study the large trader's information manipulation in crises by introducing a large trader in an asset market and a currency-attack coordination game with imperfect information. The asset price realized in the asset market aggregates dispersed private information acting as a public signal in the currency attack game. We show that the incentive of the large trader to manipulate the asset price in favor of its currency attack leads to financial contagion. In equilibrium, the large trader's manipulating the asset price to be lower and attacking the currency regime are concurrent; the large trader's manipulation in the asset market is most significant when the public signal is in the intermediate range. To draw policy implication regarding the market transparency, we show that when the asset market is transparent, a natural equilibrium refinement that incorporates forward induction reasoning would select the equilibrium where every trader behaves most aggressively in the currency-attack game and the currency regime is most fragile. Chapter 3 (with Yinqiu Lu): The way central banks manage their foreign reserve assets has evolved over the past decades. One major trend is managing reserves in two or more tranches -- liquidity tranche and investment tranche -- especially for those with adequate reserves. Incorporating reserve tranching, we have developed in this paper a central bank's reserve portfolio choice model to analyze the determinants of the currency composition of reserves. In particular, we adopt the classical mean-variance framework for the investment tranche and the asset-liability framework for the liquidity tranche. Building on these frameworks, the roles of currency compositions in imports invoicing and short-term external debt, and risk and returns of reserve currencies can be quantified by our structural model -- a key contribution of our paper given the absence of structural models in the literature. Finally, we estimate the potential paths of the share of RMB in reserves under different scenarios to shed light on its status as an international currency.

Author: Kerry Back
Publisher:
ISBN:
Category :
Languages : en
Pages : 40

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Book Description
We provide a theoretical rationale for dealer objections to ex-post transparency in corporate bond and other OTC markets: Disclosure of the terms of a transaction conveys information possessed by the dealer about the asset quality and reduces the dealer's rents when she disposes of the inventory in a second transaction. We show that costly signaling in a transparent market benefits investors through lower spreads and higher volume. Dealers may also gain from transparency despite lower spreads when potential gains from trade are small or adverse selection is high, because in those circumstances higher volume offsets smaller spreads for dealer profits.

Author: Vincent Glode
Publisher:
ISBN:
Category :
Languages : en
Pages : 64

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Book Description
Over-the-counter (OTC) markets attract substantial trading volume despite exhibiting frictions absent in centralized limit-order markets. We compare the efficiency of OTC and limit-order markets when traders' expertise is endogenous. We show that asymmetric access to counterparties in OTC markets yields increased rents to expertise acquisition for a few well-connected core traders. When the existence of gains to trade is uncertain, traders' higher expertise in OTC markets can improve allocative efficiency. In contrast, when expertise primarily causes adverse selection, competitive limit-order markets tend to dominate. Our model provides guidance for policymakers and empiricists evaluating the efficiency of market structures.

Author: Terrence Hendershott
Publisher:
ISBN:
Category : Corporate bonds
Languages : en
Pages : 44

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Book Description
We examine the network of trading relations between insurers and dealers in the over-the-counter corporate bond market. Comprehensive regulatory data shows that many insurers use only one dealer while the largest insurers have networks of up to forty dealers. Large insurers receive better prices than small insurers. However, execution costs are a non-monotone function of the network size, increasing once the network size exceeds 20 dealers. To understand these facts we build a model of decentralized trade in which insurers trade off the benefits of repeat business against dealer competition. The model can quantitatively fit the distribution of insurers' network sizes and how prices depend on insurers' size.