"An essential PhD primer on an understudied yet important area of financial markets. Financial markets are complicated, and as we are periodically reminded by confounding market turmoil, its important to understand how they work and how we can regulate them. The US stock market, which comprises assets worth roughly twenty-five trillion dollars, is relatively transparent and regulated. But the remaining majority of financial assets, worth roughly fifty trillion dollars, are traded in different types of markets that all work in different ways. Economists have come to call these markets, which include the bonds that fund public works and big business as well as the infamous derivatives that almost brought the whole system down, "over the counter" (OTC) markets. Unlike traditional stock exchanges, OTC markets are decentralized and engage networks of broker-dealers. There are many open questions about the impact these markets have on the overall economy: what happens when prices arent transparent, what happens when there are runs on these assets, should the government enter these markets when they freeze up? And importantly, because most public and business capital is traded in these markets, do they amplify and propagate negative shocks in times of crisis? This book provides a comprehensive look at the economics of OTC markets in a unified framework that encompasses many of the key theoretical developments in this growing literature. Julien Huggonier, Ben Lester, and Pierre-Olivier Weill relate these developments to recent policy debates and empirical findings that are emerging from the availability of bigger and better data sets.

The authors offer a synthesis of existing methods to help familiarize PhD students with the field and provide the basic technical skills needed to jump-start their own research on the topic. Focusing on "search-theoretic" models, the insight of which is that in OTC markets investors need to search for counterparties, which in turn makes speed and immediacy key variables, Hugonnier, Lester, and Weill provide an authoritative introduction to the most recent relevant theoretical economic models to analyze OTC markets. They use these models to walk readers through applications in various types of OTC markets alongside other theories-like network models-to provide robust tools for students to grapple with this global field of fundamental importance"--"An essential primer on an important yet understudied type of financial market. Many of the largest financial markets in the world do not organize trade through an exchange but rather operate within a decentralized or over-the-counter (OTC) structure. Understanding how these markets work has become increasingly important in recent years, as illiquidity in certain OTC markets has appeared as the first signs of trouble-if not the cause itself-of the past two financial crises. However, standard models of financial markets are not suitable for studying the causes of illiquidity in OTC markets, nor the optimal policy response. The Economics of Over-the-Counter Markets proposes a unified search-theoretic framework designed to explicitly capture the key features of OTC markets, confront the growing set of stylized facts from these markets, and provide guidance for policies designed to promote liquidity and resiliency. This incisive book covers empirical regularities that are common across OTC markets, develops the methodological tools to analyze the benchmark theoretical models in the academic literature, and extends these models to confront the latest issues facing these markets.

Covers a broad range of topics, including asset pricing, liquidity, transaction costs, asymmetric information, financial crises, and market designAn ideal textbook for graduate students in economics and finance. An invaluable resource for policymakers seeking a framework to assess the impact of new developments in fixed-income and short-term funding markets."--.