(Bank of Canada, LSE)
« Strategic Uncertainty in Financial Markets:
Evidence from a Consensus Pricing Service”
This paper studies the ability of a consensus pricing service to reduce uncertainty among dealer banks in the over-the-counter options market. The analysis is based on the structural estimation of a model of learning from prices. The estimation yields two empirical measures of uncertainty: uncertainty about option values and strategic uncertainty about competitors’ valuations. The main contribution of the consensus prices is to reduce strategic uncertainty, especially in the most opaque segments of the options market. The results stress the importance of pricing benchmarks for aggregating dispersed information and creating a shared understanding of market conditions in opaque market structures.
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