Working Paper: NBER ID: w20416
Authors: Andrew G. Atkeson; Andrea L. Eisfeldt; Pierre-Olivier Weill
Abstract: We develop a parsimonious model to study the equilibrium and socially optimal decisions of banks to enter, trade in, and possibly exit, an OTC market. Although we endow all banks with the same trading technology, banks’ optimal entry and trading decisions endogenously lead to a realistic market structure comprised of dealers and customers with distinct trading patterns. We decompose banks’ entry incentives into incentives to hedge risk and incentives to make intermediation profits. We show that dealer banks enter more than is socially optimal. In the face of large negative shocks, they may also exit more than is socially optimal when markets are not perfectly resilient.
Keywords: OTC markets; bank entry; dealer banks; market resilience
JEL Codes: G00; G01; G02
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| negative shocks (F69) | increased entry by dealer banks (G21) |
| increased entry by dealer banks (G21) | market structure with large banks as dealers (D49) |
| unfavorable market conditions (G19) | increased exit by dealer banks (G21) |
| increased exit by dealer banks (G21) | market structure with large banks as dealers (D49) |