Random Matching And Trade Relationships In Decentralized Markets

Random Matching and Trade Relationships in Decentralized Markets

Industrial Organization

Updated according to classroom feedback, this comprehensive textbook blends theory and formal models with real-world applications and take-away lessons.

The Economics of Over-the-Counter Markets

"An essential PhD primer on an understudied yet important area of financial markets. Financial markets are complicated, and as we are periodically reminded by confounding market turmoil, it's important to understand how they work and how we can regulate them. The US stock market, which comprises assets worth roughly twenty-five trillion dollars, is relatively transparent and regulated. But the remaining majority of financial assets, worth roughly fifty trillion dollars, are traded in different types of markets that all work in different ways. Economists have come to call these markets, which include the bonds that fund public works and big business as well as the infamous derivatives that almost brought the whole system down, "over the counter" (OTC) markets. Unlike traditional stock exchanges, OTC markets are decentralized and engage networks of broker-dealers. There are many open questions about the impact these markets have on the overall economy: what happens when prices aren't transparent, what happens when there are runs on these assets, should the government enter these markets when they freeze up? And importantly, because most public and business capital is traded in these markets, do they amplify and propagate negative shocks in times of crisis? This book provides a comprehensive look at the economics of OTC markets in a unified framework that encompasses many of the key theoretical developments in this growing literature. Julien Huggonier, Ben Lester, and Pierre-Olivier Weill relate these developments to recent policy debates and empirical findings that are emerging from the availability of bigger and better data sets. The authors offer a synthesis of existing methods to help familiarize PhD students with the field and provide the basic technical skills needed to jump-start their own research on the topic. Focusing on "search-theoretic" models, the insight of which is that in OTC markets investors need to search for counterparties, which in turn makes speed and immediacy key variables, Hugonnier, Lester, and Weill provide an authoritative introduction to the most recent relevant theoretical economic models to analyze OTC markets. They use these models to walk readers through applications in various types of OTC markets alongside other theories-like network models-to provide robust tools for students to grapple with this global field of fundamental importance"--