Many of the largest financial markets in the world do not organize trade through an exchange but rather operate within a decentralized or over-the-counter (OTC) structure. Understanding how these markets work has become increasingly important in recent years, as illiquidity in certain OTC markets has appeared as the first signs of trouble鈥攊f not the cause itself鈥攐f the past two financial crises. However, standard models of financial markets are not suitable for studying the causes of illiquidity in OTC markets, nor the optimal policy response. The Economics of Over-the-Counter Markets proposes a unified search-theoretic framework designed to explicitly capture the key features of OTC markets, confront the growing set of stylized facts from these markets, and provide guidance for policies designed to promote liquidity and resiliency. This incisive book covers empirical regularities that are common across OTC markets, develops the methodological tools to analyze the benchmark theoretical models in the academic literature, and extends these models to confront the latest issues facing these markets.
- Covers a broad range of topics, including asset pricing, liquidity, transaction costs, asymmetric information, financial crises, and market design
- An ideal textbook for graduate students in economics and finance
- An invaluable resource for policymakers seeking a framework to assess the impact of new developments in fixed-income and short-term funding markets
Julien Hugonnier is professor of finance at the 脡cole Polytechnique F茅d茅rale de Lausanne (EPFL) in Switzerland. Benjamin Lester is a senior economic advisor and economist at the Federal Reserve Bank of Philadelphia. Pierre-Olivier Weill is professor of economics at the University of California, Los Angeles.
“This unique book provides deep insights into the workings of over-the-counter markets, which are the major markets for corporate and government bonds as well as many financial derivatives. The analysis relies on an elegant unified theoretical framework, starting from first principles to rigorously identify the key economic mechanisms. The book will certainly prove a great resource for graduate students as well as advanced researchers, regulators, and central bankers.”—Bruno Biais, HEC Paris
“This masterpiece of exposition and scholarship is, instantly, the unique go-to reference work on the theory of over-the-counter financial markets. Hugonnier, Lester, and Weill have unified and streamlined the entire core body of relevant research, to which they themselves have contributed very significantly.”—Darrell Duffie, Stanford Graduate School of Business
“This book synthesizes groundbreaking research on over-the-counter markets, increasingly central to modern macroeconomics and finance. It integrates several generations of models while inspiring new economic theory and empirical research. A resource for forward-thinking scholars, its influence will only grow over time. I cannot wait to use it and recommend it to others.”—Marzena Rostek, University of Wisconsin–Madison
“Hugonnier, Lester, and Weill provide an excellent introduction to over-the-counter (OTC) markets, which are common in practice but underexplored in finance research. Combining insights from financial intermediation, market microstructure, and search theory, the authors deliver a clear and rigorous textbook. Ideal for a semester PhD course, the book equips students with theoretical tools, essential for policy analysis and measurement of OTC markets.”—Laura Veldkamp, coauthor of The Data Economy
