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Financial Intermediation Chains in an Over-the-Counter Market

Author

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  • Ji Shen

    (Department of Finance, Peking University, Haidian District, 100871 Beijing, China)

  • Bin Wei

    (Federal Reserve Bank of Atlanta, Atlanta, Georgia 30309)

  • Hongjun Yan

    (Department of Finance, DePaul University, Chicago, Illinois 60614)

Abstract

We analyze financial intermediation chains in a search economy that is populated by investors with heterogeneous valuations of an asset. In equilibrium, investors with moderate valuations choose to be intermediaries, and those with extreme valuations are their customers. The average length of intermediation chains is shown to be decreasing in search cost, search speed, and market size but increasing in investors’ trading needs. These predictions are distinct from those implied by existing models in the literature. Our empirical evidence, based on data from the U.S. corporate bond market, is mostly consistent with our model predictions.

Suggested Citation

  • Ji Shen & Bin Wei & Hongjun Yan, 2021. "Financial Intermediation Chains in an Over-the-Counter Market," Management Science, INFORMS, vol. 67(7), pages 4623-4642, July.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:7:p:4623-4642
    DOI: 10.1287/mnsc.2020.3687
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