Project description
Explaining the existence of non-traded assets
The majority of financial assets trade in decentralised over-the-counter (OTC) markets. In OTC markets, a substantial share of available assets is non-traded. In this context, the ERC-funded NTAOTC project will explore why many assets in OTC markets do not trade in the first place. The idea of the proposal is to understand whether non-traded assets (NTA) arise due to market frictions or due to agency frictions. For example, market frictions could be the fact that agents need to find counterparties that are willing to trade (there are search costs) or constraints of financial intermediaries, while incentive problems of agents constitute agency frictions.
Objective
Many financial assets trade in decentralized over-the-counter (OTC) markets, that is, there is no centralized marketplace and investors need to search for counterparties that are willing to trade. Contrary to centralized markets, in OTC markets a substantial share of available assets is non-traded. Existing OTC market research focuses on frequently traded assets but is unable to talk about non-traded assets (NTA). But, why do many assets in OTC markets not trade in the first place? Which frictions give rise to NTA? These questions are highly relevant for policy makers and financial stability as well because OTC markets play a central role in the financial system. This proposal presents three empirical projects that will advance our understanding of the role of intermediation frictions in OTC markets through a novel perspective—the lens of NTA.
Exploiting unique data for one of the largest OTC markets (U.S. corporate bonds), the research agenda comprises the following components:
1) Search Frictions and Non-Traded Assets. This part examines the role of search frictions for NTA. Ex-ante it is not obvious whether a large share of NTA is symptomatic of low or high search frictions. The idea is to exploit different types of shocks that affect investors’ search frictions and to investigate their impact on NTA.
2) Financial Intermediaries and Non-Traded Assets. This part studies whether financial intermediaries matter for NTA. Do assets trade more likely when intermediaries are financially unconstrained? To answer this question, the idea is to exploit detailed data on trading links between investors and dealers.
3) Corporate Finance and Non-Traded Assets. This part examines whether firms derive financial flexibility from NTA. If assets do not trade, then their investor base remains stable and investor-issuer relationships emerge. The idea is to study whether firms are more likely to implement debt management policies in NTA.
Keywords
Project’s keywords as indicated by the project coordinator. Not to be confused with the EuroSciVoc taxonomy (Fields of science)
Project’s keywords as indicated by the project coordinator. Not to be confused with the EuroSciVoc taxonomy (Fields of science)
Programme(s)
Multi-annual funding programmes that define the EU’s priorities for research and innovation.
Multi-annual funding programmes that define the EU’s priorities for research and innovation.
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HORIZON.1.1 - European Research Council (ERC)
MAIN PROGRAMME
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Topic(s)
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Calls for proposals are divided into topics. A topic defines a specific subject or area for which applicants can submit proposals. The description of a topic comprises its specific scope and the expected impact of the funded project.
Funding Scheme
Funding scheme (or “Type of Action”) inside a programme with common features. It specifies: the scope of what is funded; the reimbursement rate; specific evaluation criteria to qualify for funding; and the use of simplified forms of costs like lump sums.
Funding scheme (or “Type of Action”) inside a programme with common features. It specifies: the scope of what is funded; the reimbursement rate; specific evaluation criteria to qualify for funding; and the use of simplified forms of costs like lump sums.
HORIZON-ERC - HORIZON ERC Grants
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Call for proposal
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Procedure for inviting applicants to submit project proposals, with the aim of receiving EU funding.
(opens in new window) ERC-2022-STG
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20136 Milano
Italy
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