DP10747 Cash Providers: Asset Dissemination over Intermediation Chains

Author(s): Jean-Edouard Colliard, Gabrielle Demange
Publication Date: August 2015
Keyword(s): dealer markets, intermediation chains, liquidity, OTC markets
JEL(s): C78, D85, G21, G23
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10747

Many financial assets are disseminated to final investors via chains of over-the-counter transactions between intermediaries (dealers). We model such an intermediation process as a game with successive take-it-or-leave-it offers: An agent buying some units of an asset can offer to sell part of the volume to another OTC partner, and so on. At the equilibrium of this game, the length of intermediation chains, the terms of trade (prices and units sold) and their pattern along a chain are endogenously determined. Our model thus gives a framework to analyze how intermediation chains impact an asset's market liquidity, its issuance, and who ultimately holds the asset.