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Over-the-Counter Marketmaking

Authors: Duffie, Darrell
Garleanu, Nicolae
Pedersen, Lasse Heje
Issue Date: 15-Sep-2003
Series/Report no.: FIN-03-043
Abstract: We study how intermediation and asset prices are affected by illiquidity associated with search and bargaining. We compute explicitly marketmakers&rsqou; bid and ask prices in a dynamic model with strategic agents. Bid-ask spreads are lower if investors can more easily find other investors or have more easy access to multiple marketmakers. This distinguishes our theory from the information-based intermediation , which implies higher spreads in connection with higher investor sophistication. With a monopolistic marketmaker, bid-ask spreads are higher if investors have easier access to the marketmaker. We discuss several empirical implications and study endogenous search and welfare.
Appears in Collections:Finance Working Papers

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