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Strategic Uncertainty in Financial Markets: Evidence from a Consensus Pricing Service

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  • Lerby Ergun
  • Andreas Uthemann

Abstract

This paper measures valuation and strategic uncertainty in an over-the-counter market. The analysis uses a novel data set of price estimates that major financial institutions provide to a consensus pricing service. We model these institutions as Bayesian agents that learn from consensus prices about market conditions. Our uncertainty measures are derived from their beliefs through a structural estimation. The main contribution of the consensus pricing service is to reduce strategic uncertainty in the most opaque market segments. This stresses the importance of public data, such as financial benchmarks, for a shared understanding of market conditions in markets with limited price transparency.

Suggested Citation

  • Lerby Ergun & Andreas Uthemann, 2020. "Strategic Uncertainty in Financial Markets: Evidence from a Consensus Pricing Service," Staff Working Papers 20-55, Bank of Canada.
    • Handle: RePEc:bca:bocawp:20-55
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial institutions; Financial markets; Market structure and pricing;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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