Research

Dealer Intermediation in OTC Markets with Private Valuation (with Julien Hugonnier)

(Draft Coming Soon)

We develop a general equilibrium theory of dealer intermediation in over-the-counter (OTC) markets with private investor valuation. Trading occurs through a competitive request-for-quote (RFQ) protocol in which dealers submit random price quotes without observing investor types, and investors optimally decide whether to trade. The framework nests traditional voice trading as the special case in which a single dealer responds to each request. The equilibrium endogenously determines price distributions, investor reservation values and the stationary distribution of asset holdings. Under standard regularity conditions, we prove the existence and uniqueness of a stationary equilibrium that clears the market. We reduce the equilibrium computation to solving a functional equation and establish the convergence of the associated numerical scheme. In equilibrium, quote distributions generate endogenous bid–ask spreads, price dispersion and strictly positive probabilities of trade failure, unlike bargaining based models of OTC markets. This allows us to analyze how dealer competition, investor heterogeneity, supply and search frictions jointly determine liquidity and welfare. The model provides a unified microfoundation for recent empirical findings in RFQ markets and offers a tractable workhorse for studying decentralized markets with private information.

Debt Illiquidity and Capital Structure

(Job Market Paper)