Crises and liquidity in over-the-counter markets (Q654505)

The authors extend models of OTC markets to allow for unconstrained choices of asset holding by investors and dealers, and characterized the out-of-steady-state dinamics triggered by aggregate shocks. The economy is populated by investors and dealers who are trading by one asset, and there is one perishable good, which is a numéraire. The instantaneous utility function of an investor is constructed as \( \zeta(t)u_i(a)+c\), where \( a\geq 0 \) represents the investor's asset holding, \( c \) is the net consumption of the numéraire good, \( i\in\{1,\dots,I\}\) indexes an idiosyncratic preference shock, and \( \zeta(t) \) represents an aggregate preference shock. When the preference shock (that occur at Puasson distributed arrival time) hits, the investor draws preference type \(i\) with probability \(\pi_i\). The investigation of the constructed dynamic model is deeply fulfilled. Some qualitative implications have obtained, particularly, when OTC frictions are severe, well capitalized dealers may not find their privately optimal to accumulate inventories, and asset purchasing by the government can improve welfare.