Entry and Exit in OTC Derivatives Markets
We develop a parsimonious model to study the equilibrium and socially optimal decisions of banks to enter, trade in, and possibly exit, an OTC market. Although we endow all banks with the same trading technology, banks’ optimal entry and trading decisions endogenously lead to a realistic market structure comprised of dealers and customers with distinct trading patterns. We decompose banks’ entry incentives into incentives to hedge risk and incentives to make intermediation profits. We show that dealer banks enter more than is socially optimal. In the face of large negative shocks, they may also exit more than is socially optimal when markets are not perfectly resilient.
We’d like to thank, for fruitful comments and suggestions, the Co-Editor, three referees, as well as Gara Afonso, Saki Bigio, Briana Chang, Jean-Edouard Colliard, Darrell Duffie, Ben Lester, Gustavo Manso, Tyler Muir, Martin Oehmke, Ionid Rosu, Tano Santos, Daniel Sanches, Martin Schneider, Shouyong Shi, Randy Wright, Pierre Yared, and numerous seminar audiences. Patrick Kiefer, Pierre Mabille, Omair Syed, Alfredo Reyes, and Semih Uslu provided expert research assistance. We thank the Bank of France, the Fink Center for Finance and Investments, and the Ziman Center for Real Estate for financial support. Part of this project was completed when Pierre-Olivier Weill was a visiting Professor at the Paris School of Economics, whose hospitality is gratefully acknowledged. All errors are ours. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Andrea L. Eisfeldt
I conduct compensated financial research for a hedge fund.
Andrew G. Atkeson & Andrea L. Eisfeldt & Pierre‐Olivier Weill, 2015. "Entry and Exit in OTC Derivatives Markets," Econometrica, Econometric Society, vol. 83, pages 2231-2292, November. citation courtesy of