Dealers' insurance, market structure, and liquidity

Francesca Carapella and Cyril Monnet

No 861, BIS Working Papers from Bank for International Settlements

Abstract: We develop a parsimonious model to study the effect of regulations aimed at reducing counterparty risk on the structure of over-the-counter securities markets. We find that such regulations promote entry of dealers, thus fostering competition and lowering spreads. Greater competition, however, has an indirect negative effect on market-making profitability. General equilibrium effects imply that more competition can distort incentives of all dealers to invest in efficient technologies ex ante, and so can cause a social welfare loss. Our results are consistent with empirical findings on the effects of post-crisis regulations and with the opposition of some market participants to those regulations.

Keywords: liquidity; dealers; insurance; central counterparties (search for similar items in EconPapers)
JEL-codes: G11 G23 G28 (search for similar items in EconPapers)
Pages: 78 pages
Date: 2020-05
New Economics Papers: this item is included in nep-ias
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Related works:
Journal Article: Dealers’ insurance, market structure, and liquidity (2020)
Working Paper: Dealers' Insurance, Market Structure, And Liquidity (2018)
Working Paper: Dealers' Insurance, Market Structure, And Liquidity (2017)
Working Paper: Dealers' Insurance, Market Structure And Liquidity (2013)
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