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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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    Cited by:

    1. is not listed on IDEAS
    2. Christina Brinkmann, 2023. "Differentiation in Risk Profiles," CRC TR 224 Discussion Paper Series crctr224_2023_444, University of Bonn and University of Mannheim, Germany.
    3. Mark Paddrik & Stathis Tompaidis, 2024. "Intermediation Networks and Derivative Market Liquidity: Evidence from CDS Markets," Working Papers 24-01, Office of Financial Research, US Department of the Treasury.
    4. Christina Brinkmann, 2022. "Imperfect Competition in Derivatives Markets," ECONtribute Discussion Papers Series 153, University of Bonn and University of Cologne, Germany.

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    Keywords

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    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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