Private and public liquidity provision in over-the-counter markets

Artikel

We show that trade frictions in OTC markets result in inefficient private liquidity provision. We develop a dynamic model of market-based financial intermediation with a two-way interaction between primary credit markets and secondary OTC markets. Private allocations are generically inefficient because investors and firms fail to internalize how their actions affect liquidity in secondary markets. This inefficiency can lead to liquidity that is suboptimally low or high compared to the second best, providing a rationale for the regulation and public provision of liquidity. Moreover, our model characterizes a transmission channel of quantitative easing or tightening operating through liquidity premia.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Theoretical Economics ; ISSN: 1555-7561 ; Volume: 15 ; Year: 2020 ; Issue: 4 ; Pages: 1669-1712 ; New Haven, CT: The Econometric Society

Classification and Topics

• Classification: Wirtschaft ; Financial Markets and the Macroeconomy ; General Financial Markets: Government Policy and Regulation ; Corporate Finance and Governance: General
• Subject: Liquidity provision ; market liquidity ; over-the-counter markets ; quantitative easing ; quantitative tightening ; monetary policy normalization

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Arseneau, David M. ; Rappoport, David E. ; Vardoulakis, Alexandros P.
• Event: Veröffentlichung
• (who): The Econometric Society
• (where): New Haven, CT
• (when): 2020

Further information

• DOI: doi:10.3982/TE3419
• Handle: http://hdl.handle.net/10419/253461
• Last update: 10.03.2025, 11:44 AM CET