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The value of trading relations in turbulent times

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  • Di Maggio, Marco
  • Kermani, Amir
  • Song, Zhaogang

Abstract

This paper investigates how dealers’ trading relations shape their trading behavior in the corporate bond market. Dealers charge lower spreads to dealers with whom they have the strongest ties and more so during periods of market turmoil. Systemically important dealers exploit their connections at the expense of peripheral dealers as well as clients, charging higher markups than to other core dealers. Also, intermediation chains lengthened by 20% following the collapse of a flagship dealer in 2008 and even more for institutions strongly connected to this dealer. Finally, dealers drastically reduced their inventory during the crisis.

Suggested Citation

  • Di Maggio, Marco & Kermani, Amir & Song, Zhaogang, 2017. "The value of trading relations in turbulent times," Journal of Financial Economics, Elsevier, vol. 124(2), pages 266-284.
    • Handle: RePEc:eee:jfinec:v:124:y:2017:i:2:p:266-284
    DOI: 10.1016/j.jfineco.2017.01.003
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    More about this item

    Keywords

    Corporate bond; Dealer network; Intermediation chain; Over-the-counter financial market; Trading relationship;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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