The Economics of Over-the-Counter Markets

Name: The Economics of Over-the-Counter Markets | A Toolkit for the Analysis of Decentralized Exchange
Brand: Princeton University Press
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A Toolkit for the Analysis of Decentralized Exchange

Julien Hugonnier Benjamin Lester Pierre-Olivier Weill(Autor*in)

Princeton University Press

1. Auflage

Erschienen am 7. März 2025

400 Seiten

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Inhalt

Cover
Contents
List of Figures
List of Tables
Acknowledgments
List of Abbreviations
List of Notations
1. Introduction
2. OTC Markets Facts
2.1 The Basics
2.1.1 How Large Are OTC Markets?
2.1.2 Heterogeneity Across OTC Markets
2.1.3 OTC Market Data
2.2 U.S. Corporate Bond Market Data
2.2.1 Data
2.2.2 Cleaning the Data
2.3 Trading Activity
2.3.1 Basic Facts
2.3.2 Intermediation
2.3.3 Trading Delays
2.4 Trading Costs
2.4.1 Measurement
2.4.2 The Determinants of Trading Costs
2.4.3 Dealer-to-Dealer vs. Customer-to-Dealer Frictions
2.5 Notes and References
3. Sequential Search for Assets
3.1 The Model
3.1.1 The Investor
3.1.2 Trading Opportunities
3.2 The Sequential Search Problem
3.2.1 Formulation
3.2.2 The Dynamic Programming Principle
3.3 The Bellman Equation
3.3.1 Derivation
3.3.2 Existence, Uniqueness, and Properties of the Solution
3.3.3 Comparative Statics of Reservation Values
3.3.4 An Explicit Example
3.4 The Hamilton-Jacobi-Bellman Equation
3.4.1 A Heuristic Derivation
3.4.2 The Formal Derivation
3.4.3 The Time-Dependent Case
3.5 Exercises
3.6 Notes and References
4. Semicentralized Markets
4.1 The Model
4.2 The Frictionless Benchmark
4.3 Asset Demand
4.3.1 Bargaining between an Investor and a Dealer
4.3.2 Reservation Values
4.4 Equilibrium
4.4.1 Market Clearing
4.4.2 Asset Allocation
4.4.3 The Interdealer Price
4.4.4 Sequential Representation of Reservation Values
4.4.5 Summary
4.5 Equilibrium Implications
4.5.1 Trading Volume
4.5.2 Trading Costs
4.5.3 Liquidity Yield Spreads
4.6 Trading Relationships
4.6.1 The Model
4.6.2 Asset Demand
4.6.3 Asset Allocation
4.6.4 The Interdealer Price
4.7 Exercises
4.8 Notes and References
5. Pure Decentralized Markets
5.1 The Model
5.2 Optimal Trading by Investors
5.2.1 Bargaining between Investors
5.2.2 Reservation Values: Basic Properties
5.2.3 Reservation Values: Explicit Expressions
5.3 Equilibrium
5.3.1 Equilibrium Distributions
5.3.2 Convergence to the Efficient Allocation
5.3.3 Summary of the Equilibrium
5.4 Equilibrium Implications
5.4.1 Trading Intensities
5.4.2 Misallocation
5.4.3 Trading Volume
5.5 Asymptotic Price Effects
5.5.1 The Frictionless Limit
5.5.2 Price Level near the Frictionless Limit
5.5.3 Price Dispersion near the Frictionless Limit
5.6 Exercises
5.7 Notes and References
6. Divisible Asset Holdings
6.1 The Model
6.2 The Frictionless Benchmark
6.3 Equilibrium in the Semicentralized Market
6.3.1 Asset Demand
6.3.2 Market Clearing and the Interdealer Price
6.3.3 Asset Allocation
6.4 Closed-Form Examples
6.4.1 Quadratic Utility Flow
6.4.2 Isoelastic Utility Flow
6.4.3 The Indivisible Holding Limit
6.5 Ex-Ante Heterogeneity
6.6 Empirical Implications
6.6.1 Trade Size and Proportional Transaction Costs
6.6.2 Buy-Sell Symmetry
6.7 Exercises
6.8 Notes and References
7. Frictional Intermediation
7.1 The Model
7.2 Optimal Trading Behavior
7.2.1 Notations
7.2.2 Reservation Values
7.2.3 Trading Patterns and Equilibrium Configurations
7.3 Equilibrium
7.3.1 Parameterized Equilibrium Distributions
7.3.2 Equilibrium Existence and Basic Properties
7.4 The Intermediation Process
7.4.1 Trading Intensities and Inventory Durations
7.4.2 Trading Volume
7.4.3 Intermediation Chains
7.4.4 Markups
7.5 Quantitative Analysis
7.5.1 Evidence from the Municipal Bond Market
7.5.2 Calibration of the Model
7.6 Exercises
7.7 Notes and References
8. Price Setting Mechanisms
8.1 Strategic Foundations of Nash Bargaining
8.1.1 The Bargaining Game
8.1.2 Equilibrium Trading Patterns and Terms of Trade
8.1.3 Taking Stock
8.2 Request for Quotes as a Pricing Game
8.2.1 A Model of RFQs
8.2.2 Equilibrium
8.3 Competitive Search
8.3.1 The Market Setting
8.3.2 Optimal Behavior and Equilibrium Definition
8.3.3 An Alternative Representation of Reservation Values
8.3.4 Solving for Equilibrium
8.4 Exercises
8.5 Notes and References
9. OTC Markets under Stress
9.1 A Negative Demand Shock and a Random Recovery
9.1.1 Reservation Values in the Recovery Period
9.1.2 Reservation Values in the Stress Period
9.2 When Dealers Cannot Accumulate Inventories
9.2.1 Equilibrium
9.2.2 Incentives for Inventory Accumulation
9.3 When Dealers Can Accumulate Inventories
9.3.1 After the Recovery
9.3.2 During the Stress Period
9.3.3 Taking Stock
9.4 Exercises
9.5 Notes and References
10. Asymmetric Information: Private Values
10.1 The Model
10.1.1 The Semicentralized Market
10.1.2 Optimal Pricing by Dealers
10.1.3 Equilibrium Definition
10.2 A Detour: The Case with Three Types
10.2.1 Assumptions and Equilibrium Conjecture
10.2.2 Reservation Values
10.2.3 Asset Allocation
10.2.4 Equilibrium
10.3 Back to the Continuously Differentiable Case
10.3.1 Necessary Conditions
10.3.2 Fully Separating Equilibria
10.3.3 Uniformly Distributed Utility Flows
10.4 Omitted Proofs
10.4.1 Proof of Proposition 10.7
10.4.2 Proof of Theorem 10.9
10.4.3 Proof of Proposition 10.10
10.5 Exercises
10.6 Notes and References
11. Asymmetric Information: Common Values
11.1 Environment
11.1.1 Simplifying Assumptions
11.1.2 Notation
11.1.3 Reservation Values
11.1.4 Distributions
11.1.5 Equilibrium Definition
11.1.6 Parametric Assumption
11.2 The Special Case with ?=0
11.2.1 Equilibrium Characterization
11.2.2 Equilibrium Selection
11.3 The General Case with ?&0
11.3.1 Equilibrium Characterization
11.3.2 The Resale and Quality Effects
11.3.3 Liquidity Fluctuations and Endogenous Volatility
11.3.4 Liquidity and Search Frictions
11.3.5 Interventions in Frozen Markets
11.4 Exercises
11.5 Notes and References
12. OTC vs. Centralized Markets
12.1 The Market Setting
12.2 Equilibrium Given Dealer Entry
12.2.1 Reservation Values
12.2.2 Symmetric Equilibrium
12.3 Free Entry of Dealers
12.4 Welfare Analysis
12.4.1 Socially Optimal Participation and Trade
12.4.2 Socially Optimal Entry of Dealers
12.5 Exercises
12.6 Notes and References
13. Conclusion
A. Mathematical Tools
A.1 Fixed Point Results
A.2 Random Variables and Distributions
A.3 Exponential Random Variables
A.4 Distributions with Log-Concave Densities
A.5 Stochastic Processes
A.6 Markov Jump Processes
Bibliography
Index

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