Dark Markets

Darrell Duffie, Dean Witter Distinguished Professor of Finance at The Graduate School of Business, Stanford University, is considered one of the most influential researchers in his field. His interests include over-the-counter markets, financial risk management, credit risk, valuation of defaultable securities, valuation and hedging of derivative securities, term structure of interest rate modeling, financial innovation, and security design.

About the lecture:

Over-the-counter markets are relatively opaque. Investors in these markets frequently search for suitable counterparties and may be unaware of the prices at which trades are being conducted elsewhere in the market. Dealers and other relatively connected market participants have informational advantages and superior access to trading opportunities. Price behavior and asset allocations reflect the market opaqueness.

The lectures began with an overview of the architecture of over-the-counter markets and policy issues confronting their design and regulation in the wake of the recent financial crisis. The lectures then combined empirical evidence from various markets with new theoretical frameworks in order to shed light on the implications of market opaqueness for price behavior, allocations, and information transmission. Search-based models of information percolation, market segmentation, and price negotiation formed the center of the story.