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|
|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.