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Dealers' Insurance, Market Structure, And Liquidity

Author

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  • Francesca Carapella
  • Cyril Monnet

Abstract

We develop a parsimonious model to study the equilibrium structure of over-the- counter securities markets. We show that regulations aimed at reducing counterparty risk and improving liquidity can be inecient. Such regulations have a direct posi- tive e ect on entry in those markets, thus fostering competition and lowering spreads. Greater competition, however, has an indirect negative e ect on market making prof- itability, this e ect being stronger on more ecient intermediaries. Thus, general equi- librium e ects result in reduced incentives of all intermediaries to invest in ecient technologies and can cause a social welfare loss. The equilibrium outcome is consis- tent with some empirical findings on the e ects of post-crisis regulations and with the observed resistance by some market participants to those regulations.

Suggested Citation

  • Francesca Carapella & Cyril Monnet, 2018. "Dealers' Insurance, Market Structure, And Liquidity," Diskussionsschriften dp1812, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp1812
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    More about this item

    Keywords

    Liquidity; dealers; insurance; central counterparties;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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