asymmetric information and inventory concerns in over-the...
TRANSCRIPT
![Page 1: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/1.jpg)
Asymmetric Information and Inventory Concerns inOver-the-Counter Markets
Julien CujeanU of Maryland (Smith)
Remy PrazCopenhagen Business School
Thematic Semester on Commodity Derivatives MarketsIHP
March 26, 2015
![Page 2: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/2.jpg)
Context
Over-the-counter (OTC) markets
I Decentralized tradingI Trade details negotiated in bilateral meetingsI Trading risks: timing, quantity, price
1/35
![Page 3: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/3.jpg)
Research Question
How does information about the trading needs of your counterparties affectan OTC market?
I Costs of tradingI Market participationI Allocative efficiency and welfare
2/35
![Page 4: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/4.jpg)
Relevance
Regulators introduce post-trade transparencyTRACE, Dodd-Frank Act, MiFID II
Benefits: Better valuation of asset
BESSEMBINDER, MAXWELL, AND VENKATARAMAN (2006)GOLDSTEIN, HOTCHKISS, AND SIRRI (2007)EDWARDS, HARRIS, AND PIWOWAR (2007)
Costs: Reduced liquidity provision
Lobbying material by SIFMA, surveysDUFFIE (2012)ASQUITH, COVERT, AND PATHAK (2013)
3/35
![Page 5: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/5.jpg)
Relevance
Transparency and commodity derivatives
I Risk magazine (January 16, 2015):“liquidity at the back-end of the futures curve has dried up”
I Southwest Airlines:Spread on long-term jet fuel swaps up by 35bps.
I Timothy Massad, CFTC chairman (February 12 2015):“In an illiquid market, real-time reporting can hurt that ability [the abilityof commercial end-users to hedge]”
4/35
![Page 6: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/6.jpg)
Reduced Liquidity Provision?
a
bV = 100
quote?
P = 95
a
bV = 100
quote?
P = 90
r
huge buy bya dealer
5/35
![Page 7: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/7.jpg)
Main Findings
Transparency affectsI allocative efficiency (%)I inventory costs (%)I dispersion of transaction prices (%)
I market participation (ambiguous and fragile)I welfare (ambiguous and fragile)
6/35
![Page 8: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/8.jpg)
Literature Review
I OTC marketsDUFFIE, GARLEANU, AND PEDERSEN (2005, 2007)LAGOS AND ROCHETEAU (2007, 2009)
I OTC markets and asymmetric informationBLOUIN AND SERRANO (2001)DUFFIE AND MANSO (2007), DUFFIE, MALAMUD, AND MANSO (2009, 2010,2014)
I InventoriesHO AND STOLL (1980, 1981)GROSSMAN AND MILLER (1988)
I FormalismDIAMOND (1982)HUANG, MALHAME, AND CAINES (2006), LASRY AND LIONS (2007)
7/35
![Page 9: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/9.jpg)
Outline
Model
Market equilibrium
Market participation
7/35
![Page 10: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/10.jpg)
Assets
1. Risk-free rate r > 02. Risky asset paying dividends at the rate
dDd = md dt + �d dBt
Model 8/35
![Page 11: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/11.jpg)
Investors
I Continuum of agentsI Endowment at the rate
d⌘at = Z a
t dDt
I Time-varying exposuresdZ a
t = �a dBat
see LO, MAMAYSKY, AND WANG (2004)
Model 9/35
![Page 12: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/12.jpg)
Trading I/II
Risky asset traded on an illiquid over-the-counter (OTC) market
I Entry costs
I Expected search time is 1⇤ · (# market participants)
I Bargaining over the transaction details
see DUFFIE, GARLEANU, AND PEDERSEN (2005, 2007)
Model 10/35
![Page 13: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/13.jpg)
Trading II/II: Bargaining
(i) a asks b for a quote.(ii) If b finds it optimal
I b receives a signalsa = Xza + (1 � X )⇣,
with X ⇠ B(1, ⌧), ⇣ ⇠ µ
I b quotes a price pI a chooses a quantity q
⌧ is the transparency of the market
Model 11/35
![Page 14: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/14.jpg)
Trading II/II: Bargaining
(i) a asks b for a quote.(ii) If b finds it optimal
I b receives a signalsa = Xza + (1 � X )⇣,
with X ⇠ B(1, ⌧), ⇣ ⇠ µ
I b quotes a price pI a chooses a quantity q
⌧ is the transparency of the market
Model 11/35
![Page 15: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/15.jpg)
Trading II/II: Bargaining
a b
Signal s about a
Transparency is P[signal is correct]
(i) quoted price P(s)
(ii) traded quantity Q(P)
Model 12/35
![Page 16: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/16.jpg)
Preferences
I Investors maximize expected CARA utility from consumption
Vt = sup(cs)s�t
Et
�Z 1
te�⇢ (s�t) e�� cs ds
�
Model 12/35
![Page 17: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/17.jpg)
Timeline
Entry DecisionI initial exposuresI entry costs
I TradingI Endowment shocks
0 t 1
Model 13/35
![Page 18: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/18.jpg)
Outline
Model
Market equilibrium
Market participation
Market equilibrium
13/35
![Page 19: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/19.jpg)
Market Equilibrium
Take as given the investors in the market
tradingby others
flow equation
distribution ofexposures
HJB
my trading
=
Market equilibrium
14/35
![Page 20: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/20.jpg)
HJB Equation
⇢V (w , z) = supc
{U (cs)� Vw (w , z)c}
+ Vw (w , z) (rw + zmd )
+12
⇣Vww (w , z)z2�2 + Vzz(w , z)�2
z
⌘
+ �EL(zq ,sz )
"1{zq2A}
sup
qV (w � qP (zq , sz) , z + q)
�V (w , z)
!#
+ �
2
64 EL(za,sa)
"sup
pEL(za,sa) [V (w + Q (za, p) p, z � Q (za, p))| sa]
#
�V (w , z)
3
75
+
Market equilibrium
15/35
![Page 21: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/21.jpg)
Type Dynamics
dzt = �z dBt
+
✓Xr,t Q(zt�,P(zq , zt�))
+ (1 � Xr,t) Q(zt�,P(zq , ⇣))
◆dNr
t
+
0
@Xq,t �Q(zt�,P(zt�, zr ))
+ (1 � Xq,t) �Q(zt�,P(zt�, ⇣))� zt�
1
A dNqt ,
Market equilibrium
16/35
![Page 22: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/22.jpg)
Market Equilibrium
Proposition
There exists an equilibrium for which the value functions have the form
V (t ,w , z) = � exp⇣�r�
⇣v0(t) + v1z + v2z2
⌘⌘.
I Exponential convergence at rate 49�(1 + ⌧ 2)
I Steady-state variance of exposures
Var [z1] =�2
a49�(1 + ⌧ 2)
Market equilibrium
16/35
![Page 23: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/23.jpg)
Transparency Makes Inventories Costly
-sHz0L sHz0L exposure z
-0.02
-0.04
logHvalue functionL = vHzL
t = 0.87
t = 1
sHt=1L exposure z
1
2
stationary density of exposure
t = 0.87
t = 1
Market equilibrium
17/35
![Page 24: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/24.jpg)
Transparency Makes Inventories Costly
-sHz0L exposure z
-0.004
reservation spread
t = 0.87
t = 1
Corollary
When the transparency increases,I Trades become smallerI Cross-sectional dispersion of prices increases
⇤ Consistent with Southwest Airlines’ complaints.
Market equilibrium
18/35
![Page 25: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/25.jpg)
Outline
Model
Market equilibrium
Market participation
Market participation
18/35
![Page 26: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/26.jpg)
Endogenous Market Participation
Net benefits to joining the OTC market
�(z) = a (z � E [z0])2 + b Var [z0] + c �2
a �
E[z]0
time 0 exposure
gros
sbe
nefit
s
entry costs
won’t join!
Liquidation a is % in � & in ⌧
Intermediation b is (& 0) in � % in ⌧ entrants are substitutes
Anticipated risk-sharing c is % in � % in ⌧ entrants are complements
Market participation
19/35
![Page 27: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/27.jpg)
Rational Market Participation
E = {investors who enter the OTC market}
Eexpected
(�,�(z))E realized
=
Solution Methods
1. Homogeneous initial exposure2. Cases for which most investors enter the market3. Numerics
Market participation
20/35
![Page 28: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/28.jpg)
Rational Market Participation
E = {investors who enter the OTC market}
Eexpected
(�,�(z))E realized
=
Solution Methods
1. Homogeneous initial exposure2. Cases for which most investors enter the market3. Numerics
Market participation
20/35
![Page 29: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/29.jpg)
Market Participation: Method 1
Homogeneous initial exposure
Proposition
If Var[z0] = 0I No participation is an equilibriumI Full participation is an equilibrium if �(1) �
I Partial participation is an equilibrium if �(p) = , p 2 (0, 1)
0 1proba of entry
benefits
costs
t=0.87
t=1
Participation and Welfare weakly decreasing in transparency.Market participation
21/35
![Page 30: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/30.jpg)
Market Participation: Method 2
Solution available when there is full participation
exposure z
entry benefits bHzLentry costs k
Most investors enter the market
exposure z
entry benefits bHzLentry costs k
δ
Market participation
22/35
![Page 31: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/31.jpg)
Market Participation: Method 2
Proposition
Around the full participation case, when �a is large enough,I two equilibrium paths for ⌧ > ⌧full
I market participation and welfare can & in ⌧
I discontinuous participation drop when ⌧ < ⌧full
I Ambiguous effect of transparency onmarket participation, trading delays, welfare
I Economy is fragile in the transparency ⌧
Market participation
23/35
![Page 32: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/32.jpg)
Market Participation: Method 3
Numerical solution: Assume strong enough complementarity
0.5 1Beliefs
0.5
1
Market Participation
Realized
Rational Expectations
Market participation
24/35
![Page 33: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/33.jpg)
Transparency can Decrease liquidity
0.95 1Transparency0
0.5
1
Market Participation
0.95 1Transparency
0.1
0.2
0.3
Trading Volume
0.95 1Transparency
-13.5
-13.7
-13.9
Welfare
Market participation
25/35
![Page 34: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/34.jpg)
Transparency can Decrease Liquidity
increasedtransparency
increasedtrading costs
reducedmarket participation
reducedliquidity
either
increasedintermediation
revenuesimprovedliquidity
increasedmarket participation
or
Market participation
26/35
![Page 35: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/35.jpg)
Transparency can Decrease Liquidity
I Consistent with Southwest Airlines’ claims.I Consistent with CFTC’s view that trade dissemination can hurt hedgers.I Not consistent with
BESSEMBINDER, MAXWELL, AND VENKATARAMAN (2006)GOLDSTEIN, HOTCHKISS, AND SIRRI (2007)EDWARDS, HARRIS, AND PIWOWAR (2007)
but common value effects drive these studies.
Market participation
27/35
![Page 36: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/36.jpg)
Transparency can Increase Market Participation
0.95 1Transparency0
0.5
1
Market Participation
0.95 1Transparency
0.1
0.2
0.3
Trading Volume
0.95 1Transparency
-13.5
-13.7
-13.9
Welfare
Market participation
28/35
![Page 37: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/37.jpg)
Transparency can Increase Market Participation
increasedtransparency
increasedtrading costs
reducedmarket participation
reducedliquidity
either
increasedintermediation
revenuesimprovedliquidity
increasedmarket participation
or
Market participation
29/35
![Page 38: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/38.jpg)
Transparency can Increase Market Participation
I Some swap execution facilities (SEF) have a “name give-up” on theirorder-book, and some do not.
I Dealers favor SEF with name give-up.I Risk Magazine (February 11, 2015):
“Name give-up provides a vehicle for credit allocation”
Market participation
30/35
![Page 39: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/39.jpg)
Equilibrium is Fragile
0.95 1Transparency0
0.5
1
Market Participation
0.95 1Transparency
0.1
0.2
0.3
Trading Volume
0.95 1Transparency
-13.5
-13.7
-13.9
Welfare
Market participation
31/35
![Page 40: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/40.jpg)
Equilibrium is Fragile
increasedtransparency
increasedtrading costs
reducedmarket participation
reducedliquidity
either
increasedintermediation
revenuesimprovedliquidity
increasedmarket participation
or
Market participation
32/35
![Page 41: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/41.jpg)
Equilibrium is Fragile
Empirical Evidence
ASQUITH, COVERT, AND PATHAK (2013) document bond trading volumesbeing reduced by up to 40% after post-trade transparency was introduced.
I According to our model, this drop in trading volume was accompanied bya drop in welfare.
Market participation
33/35
![Page 42: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/42.jpg)
Equilibrium Selection
Policy Recommendation
Subsidizing liquidity provision eliminates the low participation equilibria.
I Norwegian central bank ensures a liquid sovereign bond market withattractive interest rates for dealers.
Market participation
34/35
![Page 43: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/43.jpg)
Wrapping up
I Trading is more costly in a transparent market — but less trading inequilibrium
I Market participation ambiguous and fragile in transparencyI Welfare ambiguous and fragile in transparency
Market participation
35/35
![Page 44: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/44.jpg)
Thank you!
35/35
![Page 45: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/45.jpg)
35/35
![Page 46: Asymmetric Information and Inventory Concerns in Over-the …events.chairefdd.org/wp-content/uploads/2015/05/PrazCFSD... · 2016. 4. 12. · Net benefits to joining the OTC market](https://reader033.vdocuments.mx/reader033/viewer/2022060800/6084a5659afd0d5b7a02fcbb/html5/thumbnails/46.jpg)
Parameter Values
Notation Parameter Valuer interest rate 0.01� volatility of dividends 1�a volatility of exposure 0.52⇤ scaling of matching function 1� risk-aversion 1
35/35