Working Paper: NBER ID: w12020
Authors: Darrell Duffie; Nicolae Garleanu; Lasse Heje Pedersen
Abstract: We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under certain conditions, illiquidity discounts are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging demand are larger. Supply shocks cause prices to jump, and then "recover" over time, with a time signature that is exaggerated by search frictions. We discuss a variety of empirical implications.
Keywords: No keywords provided
JEL Codes: G0; G1; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Search frictions (J69) | Difficulty in finding counterparties (D52) |
| Difficulty in finding counterparties (D52) | Higher illiquidity discounts (G19) |
| Supply shocks (E39) | Price jumps (G13) |
| Price jumps (G13) | Recovery influenced by search intensity (E71) |
| Search frictions (J69) | Higher illiquidity discounts (G19) |