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Trading and information diffusion in OTC markets

Babus, Ana and Kondor, Peter (2018) Trading and information diffusion in OTC markets. Econometrica, 86 (5). pp. 1727-1769. ISSN 0012-9682

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Identification Number: 10.3982/ECTA12043

Abstract

We propose a model of trade in over-the-counter (OTC) markets in which each dealer with private information can engage in bilateral transactions with other dealers, as determined by her links in a network. Each dealer's strategy is represented as a quantity-price schedule. We analyze the effect of trade decentralization and adverse selection on information diffusion, expected profits, trading costs and welfare. Information diffusion through prices is not affected by dealers' strategic trading motives, and there is an informational externality that constrains the informativeness of prices. Trade decentralization can both increase or decrease welfare. A dealer's trading cost is driven by both her own and her counterparties' centrality. Central dealers tend to learn more, trade more at lower costs and earn higher expected profit

Item Type: Article
Official URL: https://onlinelibrary.wiley.com/journal/14680262
Additional Information: © 2018 The Econometric Society
Divisions: Finance
Subjects: H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D85 - Network Formation and Analysis: Theory
G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
Sets: Departments > Finance
Date Deposited: 24 May 2018 09:52
Last Modified: 20 Jul 2019 00:13
URI: http://eprints.lse.ac.uk/id/eprint/88050

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