The Market for OTC Derivatives

Andrew Atkeson, Andrea Eisfeldt and Pierre-Olivier Weill

No 18912, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a model of equilibrium entry, trade, and price formation in over-the- counter (OTC) markets. Banks trade derivatives to share an aggregate risk subject to two trading frictions: they must pay a fixed entry cost, and they must limit the size of the positions taken by their traders because of risk-management concerns. Although all banks in our model are endowed with access to the same trading technology, some large banks endogenously arise as "dealers," trading mainly to provide intermediation services, while medium sized banks endogenously participate as "customers" mainly to share risks. We use the model to address positive questions regarding the growth in OTC markets as trading frictions decline, and normative questions of how regulation of entry impacts welfare.

JEL-codes: D83 G0 (search for similar items in EconPapers)
Date: 2013-03
New Economics Papers: this item is included in nep-ban, nep-dge and nep-fmk
Note: AP EFG ME
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Citations: View citations in EconPapers (32)

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Related works:
Working Paper: The Market for OTC Derivatives (2013)
Working Paper: The market for OTC derivatives (2013)
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