DP5491 Valuation in Over-the-Counter Markets

Author(s): Darrell Duffie, Nicolae Bogdan Garleanu, Lasse Heje Pedersen
Publication Date: February 2006
Keyword(s): asset pricing, bargaining, liquidity, risk, search
JEL(s): G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5491

We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under certain conditions, illiquidity discounts are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging demand are larger. Supply shocks cause prices to jump, and then 'recover' over time, with a time signature that is exaggerated by search frictions. We discuss a variety of empirical implications.