Price dispersion in OTC markets: a new measure of liquidity

Abstract

price dispersion in otc markets: a new measure of liquidity rainer jankowitsch amrut nashikkar marti subrahmanyam new york university & wirtschaftsuniversität wien for presentation at the bank of canada conference on fixed income markets ottawa, september 13th, 2008 outline research problem theoretical model data description results microstructure of otc markets • importance of over-the-counter (otc) markets: real estate, bond (treasury and corporate), most new derivative markets etc. • microstructure of otc markets is different from exchangetraded (et) markets. • lack of a centralized trading platform: trades are result of bilateral negotiations → trades can take place at different prices at the same time. • search costs for investors and inventory costs for brokerdealers (and information asymmetry). • challenges of assembling market-wide data. • important issues of illiquidity, in crises such as the present credit crisis. research questions • in the presence of search costs for traders and inventory costs for dealers: how are prices determined in an otc market? • what determines price dispersion effects, i.e., deviations between the transaction prices and their relevant marketwide valuation? • how does price dispersion capture illiquidity in such markets? • how is the “hit rate” – the proportion of transactions within the average quoted bid-ask spread – related to illiquidity? literature review • price quote determination in a inventory cost setting: – garbade and silber …

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