Thursday, November 2, 2017 at 11:40am to 1:10pm
Uris Hall, 498
Federal Reserve Bank of Philadelphia
Heterogeneity in Decentralized Asset Markets (joint w/Julien Hugonnier & Pierre-Olivier Weill)
Many assets trade in decentralized or “over-the-counter” (OTC) markets, including corporate and government bonds, emerging market debt, mortgage-backed securities, and most types of swaps. Though such markets were traditionally quite opaque, a recent push by regulators and policymakers for greater transparency has produced a number of rich, transaction-level data sets, offering a bevy of facts about the patterns of trade, the role of intermediaries, and the terms of trade that prevail in several key OTC markets. Many of these facts pose a challenge to existing models. In this paper, we extend the benchmark model of OTC markets typically attributed to Duffie, Garleanu, and Pedersen (2005) in several directions in order to make it more suitable to address these facts. Despite introducing greater complexity, we provide a solution technique that ensures the model remains fully tractable. We then exploit the equilibrium characterization to derive the model's counterparts to key statistics from the data, and perform a full structural estimation of the model for one particular market---the market for municipal securities.