Working Paper: CEPR ID: DP10747
Authors: Jean-Edouard Colliard; Gabrielle Demange
Abstract: Many financial assets are disseminated to final investors via chains of over-the-counter transactions between intermediaries (dealers). We model such an intermediation process as a game with successive take-it-or-leave-it offers: An agent buying some units of an asset can offer to sell part of the volume to another OTC partner, and so on. At the equilibrium of this game, the length of intermediation chains, the terms of trade (prices and units sold) and their pattern along a chain are endogenously determined. Our model thus gives a framework to analyze how intermediation chains impact an asset's market liquidity, its issuance, and who ultimately holds the asset.
Keywords: Dealer Markets; Intermediation Chains; Liquidity; OTC Markets
JEL Codes: C78; D85; G21; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| distribution of cash among intermediaries (G21) | length of intermediation chains (G21) |
| distribution of cash among intermediaries (G21) | terms of trade (F14) |
| variance of cash distribution increases (C46) | offers with larger discounts (L42) |
| offers with larger discounts (L42) | shorter chains (F12) |
| financing needs of intermediaries (G21) | optimal offer made by an intermediary (D41) |
| expected behavior of partners (L14) | optimal offer made by an intermediary (D41) |
| higher interest rates (E43) | sell more units at lower prices (D49) |
| sell more units at lower prices (D49) | enhances asset dissemination (G10) |
| informational asymmetries regarding cash holdings (D82) | strategic behavior (L21) |
| strategic behavior (L21) | cash being wasted (F35) |
| cash distribution (G35) | total losses (G33) |