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The market for OTC derivatives

Author

Listed:
  • Andrew Atkeson
  • Andrea L. Eisfeldt
  • Pierre-Olivier Weill

Abstract

We develop a model of equilibrium entry, trade, and price formation in over-the-counter (OTC) markets. Banks trade derivatives to share an aggregate risk subject to two trading frictions: they must pay a fixed entry cost, and they must limit the size of the positions taken by their traders because of risk-management concerns. Although all banks in our model are endowed with access to the same trading technology, some large banks endogenously arise as ?dealers,? trading mainly to provide intermediation services, while medium sized banks endogenously participate as ?customers? mainly to share risks. We use the model to address positive questions regarding the growth in OTC markets as trading frictions decline, and normative questions of how regulation of entry impacts welfare.

Suggested Citation

  • Andrew Atkeson & Andrea L. Eisfeldt & Pierre-Olivier Weill, 2013. "The market for OTC derivatives," Staff Report 479, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:479
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset pricing;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G0 - Financial Economics - - General

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