Crises and liquidity in over-the-counter markets

Ricardo Lagos, Guillaume Rocheteau, Pierre Olivier Weill

    Research output: Contribution to journalArticle

    Abstract

    We study the efficiency of liquidity provision by dealers and the desirability of policy intervention in over-the-counter (OTC) markets during crises. We emphasizes two OTC frictions: finding counterparties takes time, and trade is bilateral and involves bargaining. We model a crisis as a shock that reduces investors' asset demands, lasting until a random recovery time. In this context, dealers can provide liquidity to investors by accumulating asset inventories. When OTC frictions are severe, even well capitalized dealers may not find it privately optimal to accumulate inventories, and direct purchase by the government can improve welfare.

    Original languageEnglish (US)
    Pages (from-to)2169-2205
    Number of pages37
    JournalJournal of Economic Theory
    Volume146
    Issue number6
    DOIs
    StatePublished - Nov 2011

    Keywords

    • Asset inventories
    • Bargaining
    • Execution delays
    • Liquidity
    • Search

    ASJC Scopus subject areas

    • Economics and Econometrics

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