NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Piotr Dworczak

Nortwestern University

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Institutional Affiliation: Northwestern University

NBER Working Papers and Publications

October 2014Benchmarks in Search Markets
with Darrell Duffie, Haoxiang Zhu: w20620
We characterize the price-transparency role of benchmarks in over-the-counter markets. A benchmark can, under conditions, raise social surplus by increasing the volume of beneficial trade, facilitating more efficient matching between dealers and customers, and reducing search costs. Although the market transparency promoted by benchmarks reduces dealers' profit margins, dealers may nonetheless introduce a benchmark to encourage greater market participation by investors. Low-cost dealers may also introduce a benchmark to increase their market share relative to high-cost dealers. We construct a revelation mechanism that maximizes welfare subject to search frictions, and show conditions under which it coincides with announcing the benchmark.

Published: DARRELL DUFFIE & PIOTR DWORCZAK & HAOXIANG ZHU, 2017. "Benchmarks in Search Markets," The Journal of Finance, vol 72(5), pages 1983-2044. citation courtesy of

Robust Benchmark Design
with Darrell Duffie: w20540
Recent scandals over the manipulation of LIBOR, foreign exchange benchmarks, and other financial benchmarks have spurred policy discussions over their appropriate design. We characterize the optimal fixing of a benchmark as an estimator of a market value or reference rate. The fixing data are the reports or transactions of agents whose profits depend on the fixing, and who may therefore have incentives to manipulate it. If the benchmark administrator cannot detect or deter the strategic splitting of trades, we show that the best linear unbiased fixing is the commonly used volume-weighted average price (VWAP).
 
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