To Pool or Not to Pool? Security Design in OTC Markets

We study security issuers' decision whether to pool assets when facing counterparties endowed with market power, as is common in over-the-counter markets. Unlike in competitive markets, pooling assets may be suboptimal in the presence of market power - both privately and socially - in particula...

Full description

Saved in:
Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Glode, Vincent, Opp, Christian C, Sverchkov, Ruslan
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2020
Online AccessGet full text

Cover

More Information
Summary:We study security issuers' decision whether to pool assets when facing counterparties endowed with market power, as is common in over-the-counter markets. Unlike in competitive markets, pooling assets may be suboptimal in the presence of market power - both privately and socially - in particular, when the potential gains from trade are large. In these cases, pooling assets reduces the elasticity of trade volume in the relevant part of the payoff distribution, exacerbating inefficient rationing associated with the exercise of market power. Our results shed light on recently observed time-variation in the prevalence of pooling in financial markets.