Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Philadelphia
Working Papers
Frictional Intermediation in Over-the-Counter Markets
Julien Hugonnier
Benjamin Lester
Pierre-Olivier Weill

We extend Duffie, Gˆarleanu, and Pedersen’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 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 analyzed in empirical studies of the intermediation process in OTC markets. A calibration to the market for municipal securities reveals that the model can generate trading patterns and prices that are quantitatively consistent with the data. We use the calibrated model to compare the gains from trade that are realized in this frictional market with those from a hypothetical, frictionless environment, and to distinguish between the quantitative implications of various types of heterogeneity across dealers.

Download Full text
Cite this item
Julien Hugonnier & Benjamin Lester & Pierre-Olivier Weill, Frictional Intermediation in Over-the-Counter Markets, Federal Reserve Bank of Philadelphia, Working Papers 19-10, 31 Jan 2019.
More from this series
JEL Classification:
Subject headings:
Keywords: Over-the-counter markets; search frictions; bargaining; heterogeneous agents; intermediation
DOI: 10.21799/frbp.wp.2019.10
For corrections, contact Beth Paul ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal