| To explain the core-periphery structure observed in many OTC markets we augment a random matching model in two ways: we introduce payoff heterogeneity in types and allow banks to choose how intense they meet specific types. Banks with the least-concave flow payoff are more likely to join an intermediating core and, as quasi market-makers, have more contacts and larger transfers per meet similar to empirical observations. Further, we observe persistence in the intermediating role and, as a novel feature, can make prediction about who contacts whom: high-cost banks who are away from target contact low-cost banks more intensely than the other way around. Intermediation motivates why some banks move further away from their implied target level during the fed funds trading window. I use partially directed search (PDS) where search decisions coordinate trade among two groups that are possibly identical otherwise. Middlemen behaviour evolves endogenously and is illustrated in a small scale model. Robustness is discussed. A model based on stylized facts of 2006 replicates the puzzle where undirected search (US) comes short. PDS can also address another puzzle about inflated variances of fed funds rates in US models. |
