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Does Risk Sharing Motivate Interdealer Trading?

Author

Listed:
  • Peter C. Reiss

    (Graduate School of Business, Stanford University, and the National Bureau of Economic Research)

  • Ingrid M. Werner

    (Graduate School of Business, Stanford University, and the National Bureau of Economic Research)

Abstract

We use unique data from the London Stock Exchange to test whether interdealer trade facilitates inventory risk sharing among dealers. We develop a methodology that focuses on periods of "extreme" inventories-inventory cycles. We further distinguish between inventory cycles that are unanticipated and those that are anticipated because of "worked" orders. The pattern of interdealer trade during inventory cycles matches theoretical predictions for the direction of trade and the inventories of trade counterparts. We also show that London dealers receive higher trading revenues for taking larger positions. Copyright The American Finance Association 1998.

Suggested Citation

  • Peter C. Reiss & Ingrid M. Werner, 1998. "Does Risk Sharing Motivate Interdealer Trading?," Journal of Finance, American Finance Association, vol. 53(5), pages 1657-1703, October.
  • Handle: RePEc:bla:jfinan:v:53:y:1998:i:5:p:1657-1703
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