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Essays on over-the-counter markets

Coen, Jamie (2022) Essays on over-the-counter markets. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004424


This thesis consists of three chapters. The first chapter critically reviews the literature on over-the-counter financial markets, with a particular focus on studies that structurally estimate models of these markets. I consider the two dominant approaches—those based on network models and those based on models of random search—and discuss the merits and applicability of each in different contexts. The second chapter, co-authored with Patrick Coen, studies how firm heterogeneity determines liquidity in over-the-counter markets. We build a model of search and trading in which firms have heterogeneous search costs, and estimate this model using granular data on trading in the secondary market for sterling corporate bonds. We show that the supply of liquidity is highly concentrated, with the 8% most active traders supplying as much liquidity as the remaining 92%. We draw implications for the resilience of these markets to shocks to these active traders, the impact of banking regulation, and why new trading technologies struggle to gain traction in these markets. The third chapter, co-authored with Patrick Coen, studies the network of interconnections between banks. This network involves a fundamental trade-off: these interconnections enable banks to realise gains from trade, but expose them to risk. We build a network model of the interbank market to study this trade-off, and estimate it using novel data on interbank exposures. We show that the network is inefficient, in that a social planner can decrease risk without harming banks’ surplus. We show existing measures of banks’ systemic importance are misleading, as they don’t take into account the fact that banks select large exposures where these exposures are safe. We show existing regulation—capital requirements and caps on banks’ exposures—are inefficient, as they don’t account for how banks form the network of exposures, and propose more efficient alternatives.

Item Type: Thesis (PhD)
Additional Information: © 2022 Jamie Coen
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Economics
Supervisor: Gavazza, Alessandro and Coen, Patrick

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