Dark Markets: Asset Pricing and Information Transmission in Over-the-Counter Markets

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Princeton University Press, Dec 19, 2011 - Business & Economics - 128 pages

Over-the-counter (OTC) markets for derivatives, collateralized debt obligations, and repurchase agreements played a significant role in the global financial crisis. Rather than being traded through a centralized institution such as a stock exchange, OTC trades are negotiated privately between market participants who may be unaware of prices that are currently available elsewhere in the market. In these relatively opaque markets, investors can be in the dark about the most attractive available terms and who might be offering them. This opaqueness exacerbated the financial crisis, as regulators and market participants were unable to quickly assess the risks and pricing of these instruments.



Dark Markets offers a concise introduction to OTC markets by explaining key conceptual issues and modeling techniques, and by providing readers with a foundation for more advanced subjects in this field. Darrell Duffie covers the basic methods for modeling search and random matching in economies with many agents. He gives an overview of asset pricing in OTC markets with symmetric and asymmetric information, showing how information percolates through these markets as investors encounter each other over time. This book also features appendixes containing methodologies supporting the more theory-oriented of the chapters, making this the most self-contained introduction to OTC markets available.

 

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Contents

1 OvertheCounter Markets
1
2 The Case of Federal Funds Lending
13
3 Search for Counterparties
27
4 A Simple OTC Pricing Model
42
5 Information Percolation in OTC Markets
63
A Foundations for Random Matching
79
B Counting Processes
84
Bibliography
87
Index
93
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About the author (2011)

Darrell Duffie is the Dean Witter Distinguished Professor of Finance at Stanford University's Graduate School of Business. His books include How Big Banks Fail and What to Do about It and Dynamic Asset Pricing Theory (both Princeton).

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