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Session Overview
FMG-5: OTC Markets
Saturday, 26/Aug/2017:
11:00am - 12:30pm

Session Chair: Peter Hoffmann, European Central Bank
Location: O145

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Liquidity Fluctuations in Over the Counter Markets

Vincent Maurin

Stockholm School of Economics

Discussant(s): Sergei Glebkin (INSEAD)

This paper shows that lemon markets exhibit liquidity fluctuations whereby the ease to sell an asset varies endogenously over time. In the model, agents meet in a decentralized market and bargain under asymmetry of information about the quality of the asset. Liquidity increases with the average quality of the pool of sellers but the composition of the pool responds negatively to past liquidity. When this effect is strong, cyclical equilibria arise where prices and volume of trade oscillate without aggregate shocks. These fluctuations are generally inefficient and call for policy interventions. When the economy is in a cycle, a revertible asset purchase program can jump-start the market and smooth out fluctuations. Finally, I show that increasing market centralization harms liquidity provision and may be undesirable.

EFA2017-388-FMG-5-Maurin-Liquidity Fluctuations in Over the Counter Markets.pdf

Information and Liquidity of Over-the-Counter Securities

Song Han1, Alan Huang2, Madhu Kalimipalli3, Ke Wang1

1Federal Reserve Board; 2University of Waterloo; 3Wilfrid Laurier University

Discussant(s): Artem Neklyudov (University of Lausanne)

The Rule 144A private debt represents a significant and growing segment of the U.S. bond market. A large fraction of 144A debt issues carry registration rights and are subsequently publicly registered. We examine the effects on market liquidity of enhanced information on issuers’ financial conditions induced by the registration. We document three key results. (a) Following public registration of 144A debt, bid-ask spreads narrow, and more so for firms with higher exante information asymmetry; (b) trading activities are subdued following the public registration, based on both trading volume and frequency of trading, despite that registration broadens the investor base; and (c) bond dealers tend to reduce their net positions following the public registration. Our results are consistent with existing theories that financial transparency reduces information risk and thus improves market liquidity. However, more transparency appears to discourage participation of institutional investors as they lose the privilege of accessing the market and private information.

EFA2017-1835-FMG-5-Han-Information and Liquidity of Over-the-Counter Securities.pdf

A Network Map of Information Percolation

Björn Hagströmer1, Albert Menkveld2

1Stockholm University; 2VU University Amsterdam

Discussant(s): Shengxing Zhang (London School of Economics)

We measure information percolation in securities markets for a one security–many markets setting. Applications range from over-the-counter dealer markets to trading in multiple electronic venues. The outcome is a network map with markets as vertices and information flows as directional edges. The approach first removes pricing errors due to, for example, liquidity trades. It then measures the information flow from A to B by the strength of B’s immediate response to A. To illustrate, we analyze information percolation in foreign exchange during normal times and after the Swiss franc crash, where price discovery is suddenly left to the market.

EFA2017-989-FMG-5-Hagströmer-A Network Map of Information Percolation.pdf

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