Over-the-counter trade and the value of assets as collateral

Geromichalos, Athanasios; Lee, Jiwon; Lee, Seungduck; Oikawa, Keita

doi:10.1007/s00199-015-0904-9

Cited by 15 publications

(9 citation statements)

References 39 publications

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“… For example, Venkateswaran and Wright () and Geromichalos et al. () study the liquidity properties of assets which can be used as collateral to secure loans, within environments in which borrowers' commitment to repay their debt is limited.…”

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confidence: 99%

Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets

Geromichalos¹,

Herrenbrueck²

2016

Journal of Money, Credit and Banking

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109

101

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We revisit a traditional topic in monetary economics: the relationship between asset prices and monetary policy. We study a model in which money helps facilitate trade in decentralized markets, as in Lagos andWright (2005), and real assets are traded in an over-the-counter (OTC) market, as in Duffie, Gˆarleanu, and Pedersen (2005). Agents wish to hold liquid portfolios, but liquidity comes at a cost: inflation. The OTC market serves as a secondary asset market, in which agents can rebalance their positions depending on their liquidity needs. Hence, a contribution of our paper is to provide a micro-founded explanation of the assumption that different investors have different valuations for the same asset, which is the key for generating gains from trade in the Duffie et al framework. In equilibrium, assets can be priced higher than their fundamental value because they help agents avoid the inflation tax. Terms of use: Documents in Department of EconomicsOne Shields Avenue Davis, CA 95616 (530)752-0741 http://www.econ.ucdavis.edu/working_search.cfm Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets Athanasios GeromichalosUniversity of California -Davis Lucas Herrenbrueck University of California -DavisThis Version: September 2012 PRELIMINARY AND INCOMPLETE -PLEASE DO NOT CIRCULATE ABSTRACT ------------------------------------We revisit a traditional topic in monetary economics: the relationship between asset prices and monetary policy. We study a model in which money helps facilitate trade in decentralized markets, as in Lagos and Wright (2005), and real assets are traded in an over-the-counter (OTC) market, as in Duffie, Gârleanu, and Pedersen (2005). Agents wish to hold liquid portfolios, but liquidity comes at a cost: inflation. The OTC market serves as a secondary asset market, in which agents can rebalance their positions depending on their liquidity needs. Hence, a contribution of our paper is to provide a micro-founded explanation of the assumption that different investors have different valuations for the same asset, which is the key for generating gains from trade in the Duffie et al framework. In equilibrium, assets can be priced higher than their fundamental value because they help agents avoid the inflation tax.Keywords: monetary-search models, liquidity, asset prices, over-the-counter markets Email: ageromich@ucdavis.edu, herrenbrueck@ucdavis.edu.We are grateful to Jonathan Chiu, Miguel Molico, Guillaume Rocheteau, Christo...

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confidence: 99%

Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets

Geromichalos¹,

Herrenbrueck²

2016

Journal of Money, Credit and Banking

Self Cite

109

101

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“…Other recent papers also incorporate secondary asset market trade within a monetary search model. Examples include , Trejos and Wright (2014), Lagos and Zhang (2015), Mattesini and Nosal (2015) and Geromichalos and Jung (2015). Our paper is the first among this literature to introduce OTC market entry decisions and to study how inflation can affect these decisions and, consequently, welfare.…”

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confidence: 94%

Monetary policy and efficiency in over‐the‐counter financial trade

Geromichalos¹,

Jung

2019

Canadian J of Economics

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We develop a monetary model that incorporates over-the-counter (OTC) asset trade. After agents have made their money holding decisions, they receive an idiosyncratic shock that affects their valuation for consumption and, hence, for the unique liquid asset, namely money. Subsequently, agents can choose whether they want to enter the OTC market in order to sell assets and thus boost their liquidity or to buy assets and thus provide liquidity to other agents. In our model, inflation affects not only the money holding decisions of agents, as is standard in monetary theory, but also the entry decision of these agents in the financial market. We use our framework to study the effect of inflation on welfare, asset prices and OTC trade volume. In contrast to most monetary models, which predict a negative relationship between inflation and welfare, we find that inflation can be welfare improving within a certain range, because it mitigates a search externality that agents impose on one another when they make their OTC market entry decision. Also, an increase in the holding cost of money will lead to a decrease in asset prices, a regularity that is well documented in the data and often considered anomalous.Résumé. Politique monétaire et efficacité sur le marché financier de gré à gré. Dans cet article, nous développons un modèle monétaire intégrant la vente d'actifs négociés de gré à gré. Après encaisse, les agents subissent un choc idiosyncratique qui affecte leur appétence pour la consommation et donc pour les actifs liquides, autrement dit l'argent. Consécutivement, les agents peuvent soit décider d'accéder au marché hors cote pour vendre des actifs afin d'accroître leurs liquidités, soit d'acheter des actifs pour fournir des liquidités aux autres agents. Dans notre modèle, et conformément à la théorie monétaire, l'inflation n'affecte pas seulement les décisions des agents en matière d'encaisse, mais aussi leur décision d'accéder au marché financier. Nous utilisons notre propre cadre pour étudier les effets de l'inflation sur le bien-être, le prix des actifs et le volume des échanges négociés hors marché. Les modèles monétaires établissent pour la plupart une relation négative entre l'inflation et le niveau de bien-être; néanmoins, et contrairement à ces modèles, nous avons découvert que l'inflation pouvait améliorer le niveau de bien-être en réduisant la recherche d'externalité que s'imposent les agents entre eux lorsqu'ils intègrent le marché de gré à gré. De même, l'augmentation des coûts liés à la détention Corresponding author: Kuk Mo Jung, kmjung@sogang.ac.krWe would like to thank the editor, Francisco Ruge-Murcia and two anonymous referees for their useful comments and suggestions. The authors did not receive financial support related to this project from any institution.

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“…A common feature of the aforementioned papers is that assets possess liquidity properties because they serve directly as a medium of exchange (MOE) in frictional decentralized markets. 6 Some other papers show that assets can carry liquidity premia even if they do not serve directly as means of payment, because they can serve as collateral (Ferraris and Watanabe, 2011;Venkateswaran and Wright, 2013;Andolfatto, Martin, and Zhang, 2015;Geromichalos, Lee, Lee, and Oikawa, 2015).…”

Section: Introductionmentioning

confidence: 99%