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Federal Reserve Bank of Atlanta
FRB Atlanta Working Paper
Financial Intermediation Chains in an OTC Market
Ji Shen
Bin Wei
Hongjun Yan
Abstract

This paper analyzes financial intermediation chains in a search model with an endogenous intermediary sector. We show that the chain length and price dispersion among interdealer trades are decreasing in search cost, search speed, and market size but increasing in investors' trading needs. Using data from the U.S. corporate bond market, we find evidence broadly consistent with these predictions. Moreover, as search speed approaches infinity, the search equilibrium does not always converge to the centralized-market equilibrium: prices and allocation converge, but the trading volume might not. Finally, we analyze the multiplicity and stability of the equilibrium.


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Ji Shen & Bin Wei & Hongjun Yan, Financial Intermediation Chains in an OTC Market, Federal Reserve Bank of Atlanta, FRB Atlanta Working Paper 2018-15, 01 Dec 2018.
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Keywords: search; chain; financial intermediation; multiplicity; stability
DOI: 10.29338/wp2018-15
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