Valuation in Over-The-Counter Markets

Abstract

We provide the impact on asset prices of trade by search and bargaining. Under natural conditions, prices are higher if investors can find each other more easily, if sellers have more bargaining power, or if the fraction of qualified owners is greater. If agents face risk limits, then higher volatility leads to greater difficulty locating unconstrained buyers, resulting in lower prices. Information can fail to be revealed through trading when search is difficult. We discuss a variety of financial applications and testable implications.