Darrell Duffie: Dark markets, asset pricing and information transmission in over-the-counter markets

Abstract

In response to the financial crisis of 2007 to 2009, a large number of financial assets, such as derivatives, collateralized debt obligations, and repurchase agreements, which are traded in over-the-counter markets (OTC) are receiving increasing attention. A key feature of OTC market is its decentralized nature, that is, agents negotiate prices with each other, often pairwise, and thereby may be uninformed of prices currently traded elsewhere in the OTC market. In this opaque market, the bargaining game between market participants can be complex due to different levels of private information and various sets of outside opportunities. As a result, agents have difficulty assessing the prices and risks of OTC instruments and thus the investment behavior in OTC markets has intensified the financial crises. Some regulatory steps have been taken by the U.S. and European governments to increase competition and transparency in the OTC markets (e.g., Dodd–Frank Act in the United States). In this context, Darrell Duffie is a key contributor to the promising new research area of OTC markets, which is relatively undeveloped compared with literature on central market mechanisms. Dark Market provides an introduction to the topic and gives an overview of different asset pricing models in OTC markets characterized by symmetric and asymmetric information. Duffie seeks to understand and model the behavior of participants in decentralized markets and study the effects on asset prices and returns. He also provides a valuable framework for the analysis of how information is transmitted and how asset prices behave over time. He explains key concepts and modeling techniques for search and random matching in economies with numerous agents. The book is divided into a more theory-oriented main part and an appendix that provides further methodological support for the more advanced