The Economics of over-The-Counter Markets : A Toolkit for the Analysis of Decentralized Exchange.

Format:

Book

Author/Creator:

Hugonnier, Julien.

Contributor:

Lester, Benjamin.

Weill, Pierre-Olivier.

Language:

English

Subjects (All):

Over-the-counter markets.

Physical Description:

1 online resource (431 pages)

Edition:

1st ed.

Place of Publication:

Princeton : Princeton University Press, 2025.

Summary:

"An essential primer on an important yet understudied type of financial marketMany of the largest financial markets in the world do not organize trade through an exchange but rather operate within a decentralized or over-the-counter (OTC) structure. Understanding how these markets work has become increasingly important in recent years, as illiquidity in certain OTC markets has appeared as the first signs of trouble-if not the cause itself-of the past two financial crises. However, standard models of financial markets are not suitable for studying the causes of illiquidity in OTC markets, nor the optimal policy response. The Economics of Over-the-Counter Markets proposes a unified search-theoretic framework designed to explicitly capture the key features of OTC markets, confront the growing set of stylized facts from these markets, and provide guidance for policies designed to promote liquidity and resiliency. This incisive book covers empirical regularities that are common across OTC markets, develops the methodological tools to analyze the benchmark theoretical models in the academic literature, and extends these models to confront the latest issues facing these markets. Covers a broad range of topics, including asset pricing, liquidity, transaction costs, asymmetric information, financial crises, and market designAn ideal textbook for graduate students in economics and financeAn invaluable resource for policymakers seeking a framework to assess the impact of new developments in fixed-income and short-term funding markets"-- Provided by publisher

"An essential PhD primer on an understudied yet important area of financial markets. Financial markets are complicated, and as we are periodically reminded by confounding market turmoil, it's important to understand how they work and how we can regulate them. The US stock market, which comprises assets worth roughly twenty-five trillion dollars, is relatively transparent and regulated. But the remaining majority of financial assets, worth roughly fifty trillion dollars, are traded in different types of markets that all work in different ways. Economists have come to call these markets, which include the bonds that fund public works and big business as well as the infamous derivatives that almost brought the whole system down, "over the counter" (OTC) markets. Unlike traditional stock exchanges, OTC markets are decentralized and engage networks of broker-dealers. There are many open questions about the impact these markets have on the overall economy: what happens when prices aren't transparent, what happens when there are runs on these assets, should the government enter these markets when they freeze up? And importantly, because most public and business capital is traded in these markets, do they amplify and propagate negative shocks in times of crisis? This book provides a comprehensive look at the economics of OTC markets in a unified framework that encompasses many of the key theoretical developments in this growing literature. Julien Huggonier, Ben Lester, and Pierre-Olivier Weill relate these developments to recent policy debates and empirical findings that are emerging from the availability of bigger and better data sets. The authors offer a synthesis of existing methods to help familiarize PhD students with the field and provide the basic technical skills needed to jump-start their own research on the topic. Focusing on "search-theoretic" models, the insight of which is that in OTC markets investors need to search for counterparties, which in turn makes speed and immediacy key variables, Hugonnier, Lester, and Weill provide an authoritative introduction to the most recent relevant theoretical economic models to analyze OTC markets. They use these models to walk readers through applications in various types of OTC markets alongside other theories-like network models-to provide robust tools for students to grapple with this global field of fundamental importance"-- Provided by publisher

Contents:

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

Notes:

Includes bibliographical references and index.

Description based on publisher supplied metadata and other sources.

ISBN:

0-691-23629-1

OCLC:

1503842920