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Dark Markets by Darrell Duffie

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CHAPTER 5

Information Percolation in OTC Markets

This chapter describes a simple model of the “percolation” of information of common interest through an OTC market with many agents. Agents encounter each other at random over time and reveal information to each other through bids and offers. We are particularly interested in the evolution over time of the cross-sectional distribution of the posterior probability assignments of the various agents. This chapter is based mainly on results from Duffie and Manso (2007), Duffie, Giroux, and Manso (2010), and Duffie, Malamud, and Manso (2010b).

Hayek (1945) argued that markets allow information that is dispersed in a population to be revealed through prices. The notion of Grossman (1976) of a rational-expectations ...

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