Abstract We extend Duffie et al.’s (2005) search-theoretic model of over-the-counter (OTC) asset markets, allowing for a decentralized inter-dealer market with arbitrary heterogeneity in dealers’ valuations (or, equivalently, inventory costs). We develop a solution technique that makes the model fully tractable and allows us to derive, in closed form, theoretical formulas for key statistics analysed in empirical studies of the intermediation process in OTC markets. A calibration to the market for municipal bonds allows us to quantify important unobservable characteristics of this market, including the severity of search and bargaining frictions and the nature of heterogeneity across dealers. We use our calibrated model to study the effect of these market characteristics on total welfare and the distribution of gains from trade across customers and dealers.

Abstract We study liquidity conditions in the corporate bond market during the COVID-19 pandemic. We document that the cost of trading immediately via risky-principal trades dramatically increased at the height of the sell-off, forcing customers to shift toward slower agency trades. Exploiting eligibility requirements, we show that the Federal Reserve’s corporate credit facilities have had a positive effect on market liquidity. A structural estimation reveals that customers’ willingness to pay for immediacy increased by about 200 bps per dollar of transaction, but quickly subsided after the Fed announced its interventions. Dealers’ marginal cost also increased substantially but did not fully subside.