Summary
Many financial assets trade in decentralized over-the-counter (OTC) markets, that is, there is no centralized marketplace and investors need to search for counterparties that are willing to trade. Contrary to centralized markets, in OTC markets a substantial share of available assets is non-traded. Existing OTC market research focuses on frequently traded assets but is unable to talk about non-traded assets (NTA). But why do many assets in OTC markets not trade in the first place? Which frictions give rise to NTA? These questions are highly relevant for policy makers and financial stability as well because OTC markets play a central role in the financial system. This proposal presents three empirical components that will advance our understanding of the role of intermediation frictions in OTC markets through a novel perspective—the lens of NTA. Components one and two focus on the existence of NTA due to market frictions. In particular, component one examines the role of search frictions for NTA. Are NTA symptomatic of low or high search frictions? Component two studies whether financial intermediaries' matter for NTA. Do assets trade more likely when intermediaries are financially unconstrained? Finally, component three focuses on NTA as a cure to agency frictions, that is, NTA could be an instrument to create financial flexibility.
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| Web resources: | https://cordis.europa.eu/project/id/101075924 |
| Start date: | 01-05-2023 |
| End date: | 30-04-2028 |
| Total budget - Public funding: | 1 416 812,50 Euro - 1 416 812,00 Euro |
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Original description
Many financial assets trade in decentralized over-the-counter (OTC) markets, that is, there is no centralized marketplace and investors need to search for counterparties that are willing to trade. Contrary to centralized markets, in OTC markets a substantial share of available assets is non-traded. Existing OTC market research focuses on frequently traded assets but is unable to talk about non-traded assets (NTA). But, why do many assets in OTC markets not trade in the first place? Which frictions give rise to NTA? These questions are highly relevant for policy makers and financial stability as well because OTC markets play a central role in the financial system. This proposal presents three empirical projects that will advance our understanding of the role of intermediation frictions in OTC markets through a novel perspective—the lens of NTA.Exploiting unique data for one of the largest OTC markets (U.S. corporate bonds), the research agenda comprises the following components:
1) Search Frictions and Non-Traded Assets. This part examines the role of search frictions for NTA. Ex-ante it is not obvious whether a large share of NTA is symptomatic of low or high search frictions. The idea is to exploit different types of shocks that affect investors’ search frictions and to investigate their impact on NTA.
2) Financial Intermediaries and Non-Traded Assets. This part studies whether financial intermediaries matter for NTA. Do assets trade more likely when intermediaries are financially unconstrained? To answer this question, the idea is to exploit detailed data on trading links between investors and dealers.
3) Corporate Finance and Non-Traded Assets. This part examines whether firms derive financial flexibility from NTA. If assets do not trade, then their investor base remains stable and investor-issuer relationships emerge. The idea is to study whether firms are more likely to implement debt management policies in NTA.
Status
SIGNEDCall topic
ERC-2022-STGUpdate Date
09-02-2023
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