Asset Reallocation in Markets with Intermediaries Under Selling Pressure

58 Pages Posted: 10 Jan 2019 Last revised: 26 Feb 2020

See all articles by Swaminathan Balasubramaniam

Swaminathan Balasubramaniam

Washington University in St. Louis - John M. Olin Business School

Armando R. Gomes

Washington University in St. Louis - John M. Olin Business School; Washington University in Saint Louis - John M. Olin Business School

SangMok Lee

Washington University in St. Louis

Date Written: Feb 19, 2020

Abstract

We study a search model of investors’ asset trading, intermediated by financial institutions that are at risk of selling under pressure. The pressure can lead to the development of a secondary market, where intermediaries bail each other out. Counterintuitively, an increase in competing intermediaries can lead to an increase of each intermediary’s value: the enhanced benefits of secondary trades can be so large as to dominate the reduction in value from narrower buy-sell spreads due to more intense competition. The market exhibits search externality; suppressing investors’ direct trading can improve welfare. We provide a calibration to the corporate acquisition market.

Keywords: Asset trading, OTC markets, Financial intermediation, Search and matching, Secondary market

Suggested Citation

Balasubramaniam, Swaminathan and Gomes, Armando R. and Gomes, Armando R. and Lee, SangMok, Asset Reallocation in Markets with Intermediaries Under Selling Pressure (Feb 19, 2020). Available at SSRN: https://ssrn.com/abstract=3302977 or http://dx.doi.org/10.2139/ssrn.3302977

Swaminathan Balasubramaniam

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Armando R. Gomes

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4569 (Phone)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4569 (Phone)

SangMok Lee (Contact Author)

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

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