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Endogenous intermediation in over-the-counter markets

Research output: Contribution to journalArticle

Original languageEnglish
Pages (from-to)200-215
Number of pages16
JournalJournal of Financial Economics
Volume125
Issue number1
Early online date8 May 2017
DOIs
DateAccepted/In press - 19 Jul 2016
DateE-pub ahead of print - 8 May 2017
DatePublished (current) - 1 Jul 2017

Abstract

We provide a theory of trading through intermediaries in over-the-counter markets. The role of intermediaries is to sustain trade. In our model, traders are connected through an informational network. Agents observe their neighbors’ actions and can trade with their counterparty in a given period through a path of intermediaries in the network. Nevertheless, agents can renege on their obligations. We show that trading through an informational network is essential to support trade when agents infrequently meet the same counteparty. However, intermediaries must receive fees to implement trades. Concentrated intermediation, as represented by a star network, is both constrained efficient and stable when agents incur linking costs. The center agent in a star can receive higher fees as well.

    Structured keywords

  • ECON Macroeconomics
  • ECON Microeconomic Theory

    Research areas

  • Dynamic network formation, Over-the-counter trading, Strategic default

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  • Full-text PDF (accepted author manuscript)

    Rights statement: This is the author accepted manuscript (AAM). The final published version (version of record) is available online via Elsevier at http://www.sciencedirect.com/science/article/pii/S0304405X17300788 . Please refer to any applicable terms of use of the publisher.

    Accepted author manuscript, 247 KB, PDF document

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