Non-Traded Assets in Over-the-Counter Markets

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. Component 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.  

Articles on Bocconi Knowledge: 

• The Hidden Workings of Overlooked OTC Markets