Relationship Trading in OTC Markets
49 Pages Posted: 12 Dec 2017
There are 2 versions of this paper
Relationship Trading in OTC Markets
Date Written: November 2017
Abstract
We examine the network of trading relations between insurers and dealers in the over-the-counter corporate bond market. Comprehensive regulatory data shows that many insurers use only one dealer while the largest insurers have networks of up to forty dealers. Large insurers receive better prices than small insurers. However, execution costs are a non-monotone function of the network size, increasing once the network size exceeds 20 dealers. To understand these facts we build a model of decentralized trade in which insurers trade off the benefits of repeat business against dealer competition. The model can quantitatively fit the distribution of insurers' network sizes and how prices depend on insurers' size.
Keywords: corporate bond, Decentralization, Financial Networks, liquidity, Over-the-counter market, trading cost
JEL Classification: G12, G14, G24
Suggested Citation: Suggested Citation
Terrence J. Hendershott (Contact Author)
University of California, Berkeley - Haas School of Business ( email )
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Dan Li
Board of Governors of the Federal Reserve System ( email )
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Dmitry Livdan
University of California, Berkeley ( email )
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