Darrell Duffie
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691138961
- eISBN:
- 9781400840519
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691138961.003.0001
- Subject:
- Economics and Finance, Financial Economics
This chapter introduces the institutional setting of over-the-counter (OTC) markets and raises some of the key conceptual issues associated with market opaqueness. An OTC market does not use a ...
More
This chapter introduces the institutional setting of over-the-counter (OTC) markets and raises some of the key conceptual issues associated with market opaqueness. An OTC market does not use a centralized trading mechanism, such as an auction, specialist, or limit-order book, to aggregate bids and offers and to allocate trades. Instead, buyers and sellers negotiate terms privately, often in ignorance of the prices currently available from other potential counterparties and with limited knowledge of trades recently negotiated elsewhere in the market. OTC markets are thus said to be relatively opaque; investors are somewhat in the dark about the most attractive available terms and about whom to contact for attractive terms. Prices and allocations in OTC markets are, to varying extents, influenced by opaqueness and by the role of intermediating brokers and dealers.Less
This chapter introduces the institutional setting of over-the-counter (OTC) markets and raises some of the key conceptual issues associated with market opaqueness. An OTC market does not use a centralized trading mechanism, such as an auction, specialist, or limit-order book, to aggregate bids and offers and to allocate trades. Instead, buyers and sellers negotiate terms privately, often in ignorance of the prices currently available from other potential counterparties and with limited knowledge of trades recently negotiated elsewhere in the market. OTC markets are thus said to be relatively opaque; investors are somewhat in the dark about the most attractive available terms and about whom to contact for attractive terms. Prices and allocations in OTC markets are, to varying extents, influenced by opaqueness and by the role of intermediating brokers and dealers.
Darrell Duffie
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691138961
- eISBN:
- 9781400840519
- Item type:
- book
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691138961.001.0001
- Subject:
- Economics and Finance, Financial Economics
Over-the-counter (OTC) markets for derivatives, collateralized debt obligations, and repurchase agreements played a significant role in the global financial crisis. Rather than being traded through a ...
More
Over-the-counter (OTC) markets for derivatives, collateralized debt obligations, and repurchase agreements played a significant role in the global financial crisis. Rather than being traded through a centralized institution such as a stock exchange, OTC trades are negotiated privately between market participants who may be unaware of prices that are currently available elsewhere in the market. In these relatively opaque markets, investors can be in the dark about the most attractive available terms and who might be offering them. This opaqueness exacerbated the financial crisis, as regulators and market participants were unable to quickly assess the risks and pricing of these instruments. This book offers a concise introduction to OTC markets by explaining key conceptual issues and modeling techniques, and by providing readers with a foundation for more advanced subjects in this field. The book covers the basic methods for modeling search and random matching in economies with many agents. It gives an overview of asset pricing in OTC markets with symmetric and asymmetric information, showing how information percolates through these markets as investors encounter each other over time. The book also features appendixes containing methodologies supporting the more theory-oriented of the chapters, making this the most self-contained introduction to OTC markets available.Less
Over-the-counter (OTC) markets for derivatives, collateralized debt obligations, and repurchase agreements played a significant role in the global financial crisis. Rather than being traded through a centralized institution such as a stock exchange, OTC trades are negotiated privately between market participants who may be unaware of prices that are currently available elsewhere in the market. In these relatively opaque markets, investors can be in the dark about the most attractive available terms and who might be offering them. This opaqueness exacerbated the financial crisis, as regulators and market participants were unable to quickly assess the risks and pricing of these instruments. This book offers a concise introduction to OTC markets by explaining key conceptual issues and modeling techniques, and by providing readers with a foundation for more advanced subjects in this field. The book covers the basic methods for modeling search and random matching in economies with many agents. It gives an overview of asset pricing in OTC markets with symmetric and asymmetric information, showing how information percolates through these markets as investors encounter each other over time. The book also features appendixes containing methodologies supporting the more theory-oriented of the chapters, making this the most self-contained introduction to OTC markets available.
Isabelle Huault and Hélène Rainelli-Weiss
- Published in print:
- 2013
- Published Online:
- January 2013
- ISBN:
- 9780199595341
- eISBN:
- 9780191750755
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199595341.003.0008
- Subject:
- Business and Management, Political Economy
In this paper, we notice that a large proportion of modern financial markets, and the near totality of derivatives markets are OTC markets where bilateral contracts are exchanged between ...
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In this paper, we notice that a large proportion of modern financial markets, and the near totality of derivatives markets are OTC markets where bilateral contracts are exchanged between counterparties in the absence of any centralised structure. Our thesis is that to be useful, a critical perspective on modern finance should take full account of the nature of these markets, which exhibit no transparency of prices and offer little guarantee as for the efficiency of competition mechanisms. We propose to characterise the nature of OTC markets using Boltanski and Chiapello's concept (1999/2005) of the connexionist world. This provides, we argue, a renewed perspective on the role of innovation in modern finance. We then emphasize the difficulty of the connexionist grammar of worth to develop principles of justice in OTC markets, which are characterised by their technicality, their deterritorialization and the infinity of potential members. We suggest potential tracks to struggle more efficiently against the drifts of connexionist logic as they arise on financial markets and their spillover effects on societies.Less
In this paper, we notice that a large proportion of modern financial markets, and the near totality of derivatives markets are OTC markets where bilateral contracts are exchanged between counterparties in the absence of any centralised structure. Our thesis is that to be useful, a critical perspective on modern finance should take full account of the nature of these markets, which exhibit no transparency of prices and offer little guarantee as for the efficiency of competition mechanisms. We propose to characterise the nature of OTC markets using Boltanski and Chiapello's concept (1999/2005) of the connexionist world. This provides, we argue, a renewed perspective on the role of innovation in modern finance. We then emphasize the difficulty of the connexionist grammar of worth to develop principles of justice in OTC markets, which are characterised by their technicality, their deterritorialization and the infinity of potential members. We suggest potential tracks to struggle more efficiently against the drifts of connexionist logic as they arise on financial markets and their spillover effects on societies.
Darrell Duffie
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691138961
- eISBN:
- 9781400840519
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691138961.003.0004
- Subject:
- Economics and Finance, Financial Economics
This chapter presents a simple introduction to asset pricing in over-the-counter markets. Investors search for opportunities to trade and bargain with counterparties, each counterparty being aware ...
More
This chapter presents a simple introduction to asset pricing in over-the-counter markets. Investors search for opportunities to trade and bargain with counterparties, each counterparty being aware that failure to conduct a trade could lead to a costly new search for a counterparty. In equilibrium, whenever there is gain from trade, the opportunity to search for a new counterparty is dominated by trading at the equilibrium asset price. The asset price reflects the degree of search frictions. Under conditions, illiquidity premia are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, and when risk aversion, volatility, or hedging demand is larger. Supply shocks cause prices to jump, and then “recover” over time, with a pattern that depends on the degree of search frictions. The chapter shows how the equilibrium bargaining powers of the counterparties are determined by search opportunities using the approach of Rubinstein and Wolinsky (1985).Less
This chapter presents a simple introduction to asset pricing in over-the-counter markets. Investors search for opportunities to trade and bargain with counterparties, each counterparty being aware that failure to conduct a trade could lead to a costly new search for a counterparty. In equilibrium, whenever there is gain from trade, the opportunity to search for a new counterparty is dominated by trading at the equilibrium asset price. The asset price reflects the degree of search frictions. Under conditions, illiquidity premia are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, and when risk aversion, volatility, or hedging demand is larger. Supply shocks cause prices to jump, and then “recover” over time, with a pattern that depends on the degree of search frictions. The chapter shows how the equilibrium bargaining powers of the counterparties are determined by search opportunities using the approach of Rubinstein and Wolinsky (1985).
Heping Cao
- Published in print:
- 2013
- Published Online:
- May 2013
- ISBN:
- 9780199698547
- eISBN:
- 9780191745522
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199698547.003.0012
- Subject:
- Economics and Finance, South and East Asia, Macro- and Monetary Economics
This paper surveys a market instead of an agent in a market. Specifically, the survey examines how the individual agent’s behavior of an informal trading spot are forged into integrated action, ...
More
This paper surveys a market instead of an agent in a market. Specifically, the survey examines how the individual agent’s behavior of an informal trading spot are forged into integrated action, which, as a unit force, ignites reactions from related markets and triggers regulations and enforcements. In consequence, a market is generated and a corresponding border is defined, given an institutional matrix. The case we survey is the emerging capital market in China. With the launch of reform in 1978, China’s goods markets were booming robustly over a decade while its capital markets lagged behind. Beginning in the 1990s, an economic renaissance, later called Property Exchanges (PEs), has been thriving, though down and up, to 250 spots (half of them under the name of Intellectual Property Exchanges, IPEs). The idiosyncrasy of PEs (IPEs) genesis does not fit into the development patterns of a capital market and venturing a path tantalizing our vision of what a market and hence, a market economy, would have been and will be demonstrating. Comprehensively reporting PIPEs status creates further challenging explorations. This preliminary survey employs four sections, (1) the genesis of property and intellectual property exchanges (PIPEs), (2) the renaissance of PIPEs with public-style goods shortage, (3) the current status of PIPEs and its comparative advantage over OTC’s market and (4) a solution guide for policy proposals, to report the author’s findings and to invite further studies.Less
This paper surveys a market instead of an agent in a market. Specifically, the survey examines how the individual agent’s behavior of an informal trading spot are forged into integrated action, which, as a unit force, ignites reactions from related markets and triggers regulations and enforcements. In consequence, a market is generated and a corresponding border is defined, given an institutional matrix. The case we survey is the emerging capital market in China. With the launch of reform in 1978, China’s goods markets were booming robustly over a decade while its capital markets lagged behind. Beginning in the 1990s, an economic renaissance, later called Property Exchanges (PEs), has been thriving, though down and up, to 250 spots (half of them under the name of Intellectual Property Exchanges, IPEs). The idiosyncrasy of PEs (IPEs) genesis does not fit into the development patterns of a capital market and venturing a path tantalizing our vision of what a market and hence, a market economy, would have been and will be demonstrating. Comprehensively reporting PIPEs status creates further challenging explorations. This preliminary survey employs four sections, (1) the genesis of property and intellectual property exchanges (PIPEs), (2) the renaissance of PIPEs with public-style goods shortage, (3) the current status of PIPEs and its comparative advantage over OTC’s market and (4) a solution guide for policy proposals, to report the author’s findings and to invite further studies.
Darrell Duffie
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691138961
- eISBN:
- 9781400840519
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691138961.003.0005
- Subject:
- Economics and Finance, Financial Economics
This chapter describes a simple model of the “percolation” of information of common interest through an over-the-counter market with many agents. It also includes an explicit solution for the ...
More
This chapter describes a simple model of the “percolation” of information of common interest through an over-the-counter market with many agents. It also includes an explicit solution for the cross-sectional distribution of posterior beliefs at each time. It begins with the basic information structure for the economy and the setting for search and random matching. It then shows how to solve the model for the dynamics of the cross-sectional distribution of information. The remainder of the chapter is devoted to market settings and to extensions of the model that handle public releases of information, the receipt of new private information over time, and the release of information among groups of more than two agents at a time.Less
This chapter describes a simple model of the “percolation” of information of common interest through an over-the-counter market with many agents. It also includes an explicit solution for the cross-sectional distribution of posterior beliefs at each time. It begins with the basic information structure for the economy and the setting for search and random matching. It then shows how to solve the model for the dynamics of the cross-sectional distribution of information. The remainder of the chapter is devoted to market settings and to extensions of the model that handle public releases of information, the receipt of new private information over time, and the release of information among groups of more than two agents at a time.
Darrell Duffie
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691138961
- eISBN:
- 9781400840519
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691138961.003.0002
- Subject:
- Economics and Finance, Financial Economics
This chapter shows how the intraday allocation and pricing of overnight loans of federal funds reflect the over-the-counter interbank market in which these loans are traded. It provides estimates of ...
More
This chapter shows how the intraday allocation and pricing of overnight loans of federal funds reflect the over-the-counter interbank market in which these loans are traded. It provides estimates of how the likelihood that some bank i borrows from some other bank j during a particular minute t of a business day, as well as the interest rate on the loan, depend on the prior trading relationship between these two banks, the extents to which their balances at the beginning of minute t are above or below their normal respective balances for that time of day, their overall levels of trading activities, the amount of time left until their end-of-day balances are monitored for reserve-requirement purposes, and the volatility of the federal funds rate in the trailing 30 minutes.Less
This chapter shows how the intraday allocation and pricing of overnight loans of federal funds reflect the over-the-counter interbank market in which these loans are traded. It provides estimates of how the likelihood that some bank i borrows from some other bank j during a particular minute t of a business day, as well as the interest rate on the loan, depend on the prior trading relationship between these two banks, the extents to which their balances at the beginning of minute t are above or below their normal respective balances for that time of day, their overall levels of trading activities, the amount of time left until their end-of-day balances are monitored for reserve-requirement purposes, and the volatility of the federal funds rate in the trailing 30 minutes.
Darrell Duffie
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691138961
- eISBN:
- 9781400840519
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691138961.003.0003
- Subject:
- Economics and Finance, Financial Economics
This chapter introduces the modeling of search and random matching in large economies. The objective is to build intuition and techniques for later chapters. After some mathematical prerequisites, it ...
More
This chapter introduces the modeling of search and random matching in large economies. The objective is to build intuition and techniques for later chapters. After some mathematical prerequisites, it defines the notion of random matching. It then invokes the law of large numbers to calculate the cross-sectional distribution of types of matches. This is extended to multiperiod search, first in discrete-time settings and then in continuous time. The optimal search intensity of a given agent, given the cross-sectional distribution of types in the population, is characterized with Bellman's principle. The chapter then briefly takes up the issue of equilibrium search efforts.Less
This chapter introduces the modeling of search and random matching in large economies. The objective is to build intuition and techniques for later chapters. After some mathematical prerequisites, it defines the notion of random matching. It then invokes the law of large numbers to calculate the cross-sectional distribution of types of matches. This is extended to multiperiod search, first in discrete-time settings and then in continuous time. The optimal search intensity of a given agent, given the cross-sectional distribution of types in the population, is characterized with Bellman's principle. The chapter then briefly takes up the issue of equilibrium search efforts.
