Discussion Paper Details

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Title: The Market for OTC Derivatives

Author(s): Andrew Atkeson, Andrea L. Eisfeldt and Pierre-Olivier Weill

Publication Date: March 2013

Keyword(s): credit default swaps, dealers and OTC markets

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Atkeson, A, Eisfeldt, A and Weill, P. 2013. 'The Market for OTC Derivatives '. London, Centre for Economic Policy Research.