NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Valuation in Over-the-Counter Markets

Darrell Duffie, Nicolae Garleanu, Lasse Heje Pedersen

NBER Working Paper No. 12020*
Issued in February 2006
NBER Program(s):   AP

We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under certain conditions, illiquidity discounts are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging demand are larger. Supply shocks cause prices to jump, and then "recover" over time, with a time signature that is exaggerated by search frictions. We discuss a variety of empirical implications.

*Published: Duffie, Darrell, Nicolae Garleanu, and Lasse Heje Pedersen. "Valuation in Over-the-Counter Markets." Review of Financial Studies 20, 5 (2007): 1865-1900.

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