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Bid-Ask Spreads and the Over-the-Counter Interdealer Markets: Core and Peripheral Dealers

Author

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  • Artem Neklyudov

    (Universite de Lausanne)

Abstract

This paper studies heterogeneity in search technology among dealers in an over-the-counter (OTC) market. Empirical evidence suggests that in many OTC markets dealer networks have a core-peripheral structure with customer bid-ask spreads depending on whether a customer trades with a more central dealer or a more peripheral dealer. The paper develops a baseline search and matching model, which produces a robust centrality discount—lower bid-ask spreads offered by more central dealers. When dealers are allowed to move sufficient amounts of trading capital between their idiosyncratic states the same model parameters may produce a centrality premium. Numerical analysis of the model shows the effects of different underlying distributions of the heterogeneity in search technology on dealer networks and welfare. (Copyright: Elsevier)

Suggested Citation

  • Artem Neklyudov, 2019. "Bid-Ask Spreads and the Over-the-Counter Interdealer Markets: Core and Peripheral Dealers," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 57-84, July.
  • Handle: RePEc:red:issued:18-286
    DOI: 10.1016/j.red.2019.04.005
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    References listed on IDEAS

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    1. Robert Shimer & Gregor Jarosch & Maryam Farboodi, 2016. "Meeting Technologies in Decentralized Asset Markets," 2016 Meeting Papers 844, Society for Economic Dynamics.
    2. Julien HUGONNIER & Benjamin LESTER & Pierre-Olivier WEILL, 2014. "Heterogeneity in Decentralized Asset Markets," Swiss Finance Institute Research Paper Series 14-67, Swiss Finance Institute.
    3. Konrad Podczeck & Daniela Puzzello, 2012. "Independent random matching," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(1), pages 1-29, May.
    4. Darrell Duffie, 2012. "Over-The-Counter Markets," Introductory Chapters,in: Dark Markets: Asset Pricing and Information Transmission in Over-the-Counter Markets Princeton University Press.
    5. Pierre-Olivier Weill, 2007. "Leaning Against the Wind," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1329-1354.
    6. Vayanos, Dimitri & Wang, Tan, 2007. "Search and endogenous concentration of liquidity in asset markets," Journal of Economic Theory, Elsevier, vol. 136(1), pages 66-104, September.
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    8. Peter G. Dunne & Harald Hau & Michael J. Moore, 2015. "Dealer Intermediation Between Markets," Journal of the European Economic Association, European Economic Association, vol. 13(5), pages 770-804, October.
    9. Andrew G. Atkeson & Andrea L. Eisfeldt & Pierre‐Olivier Weill, 2015. "Entry and Exit in OTC Derivatives Markets," Econometrica, Econometric Society, vol. 83, pages 2231-2292, November.
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    More about this item

    Keywords

    Over-the-counter markets; Dealer networks; Decentralized trading; Bid-ask spreads; Liquidity; Market quality;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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