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An Information-based Theory of Financial Intermediation

Author

Listed:
  • Zachary Bethune

    (University of Virginia)

  • Bruno Sultanum

    (Federal Reserve Bank of Richmond)

  • Nicholas Trachter

    (Federal Reserve Bank of Richmond)

Abstract
We advance a theory of intermediation that builds on private information and heterogeneous screening ability across market participants. We solve for the equilibrium market structure and show that investors with high screening ability are the largest intermediators: they are the most central in trade, they trade frequently, they trade with many different counterparties, and they extract high rents. We derive a set of testable predictions from the model and we test them using transaction-level micro data. Our empirical results provide evidence that our mechanism relying on private information and screening ability is a relevant feature of intermediation in over-the-counter markets.

Suggested Citation

  • Zachary Bethune & Bruno Sultanum & Nicholas Trachter, 2019. "An Information-based Theory of Financial Intermediation," 2019 Meeting Papers 403, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:403
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Lester, Benjamin & Weill, Pierre-Olivier & Hugonnier, Julien, 2022. "Heterogeneity in decentralized asset markets," Theoretical Economics, Econometric Society, vol. 17(3), July.
    2. Jérôme Dugast & Semih Üslü & Pierre-Olivier Weill, 2022. "A Theory of Participation in OTC and Centralized Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(6), pages 3223-3266.
    3. Pierre-Olivier Weill, 2020. "The search theory of OTC markets," NBER Working Papers 27354, National Bureau of Economic Research, Inc.
    4. Gabrovski, Miroslav & Kospentaris, Ioannis, 2021. "Intermediation in over-the-counter markets with price transparency," Journal of Economic Theory, Elsevier, vol. 198(C).
    5. Lester, Benjamin & Shourideh, Ali & Venkateswaran, Venky & Zetlin-Jones, Ariel, 2023. "Market-making with search and information frictions," Journal of Economic Theory, Elsevier, vol. 212(C).

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    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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