Over-the-Counter Markets for Nonstandardized Assets

Abstract

We study a search and bargaining model of over-the-counter markets for nonstandardized assets of heterogeneous quality. Once matched, investors privately learn their values positively correlated with asset quality. Bargaining results in delay that is hump-shaped in quality and U-shaped in asset turnover. We document these patterns in commercial real estate and corporate bonds markets. Extreme qualities are little affected by changes in asset standardization, while intermediate qualities are more susceptible. For nonstandardized assets, opacity ensures active trading of all assets, which explains why their trading is decentralized and suggests that trade centralization should come with greater standardization.