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OTC Intermediaries

Author

Listed:
  • Andrea Eisfeldt

    (University of California, Los Angeles)

  • Bernard Herskovic

    (University of California, Los Angeles)

  • Sriram Rajan

    (Office of Financial Research)

  • Emil Siriwardane

    (Harvard Business School)

Abstract

We study the effect of dealer exit on prices and quantities in a model of an over-the-counter (OTC) market featuring a core-periphery network with bilateral trading costs. The model is calibrated using regulatory data on the entire U.S. credit default swap (CDS) market between 2010-2013. Prices depend crucially on the risk-bearing capacity of core dealers, yet unlike standard models featuring a dealer sector, we allow for heterogeneity in dealer risk-bearing capacity. This heterogeneity is quantitatively important. Depending on how well dealers share risk, the exit of a single dealer can cause credit spreads to rise by 8 to 24%.

Suggested Citation

  • Andrea Eisfeldt & Bernard Herskovic & Sriram Rajan & Emil Siriwardane, 2018. "OTC Intermediaries," Working Papers 18-05, Office of Financial Research, US Department of the Treasury.
    • Handle: RePEc:ofr:wpaper:18-05
    as

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    References listed on IDEAS

    as
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