Inventory, Market Making, and Liquidity in OTC Markets

Assa Cohen (), Mahyar Kargar, Benjamin Lester and Pierre-Olivier Weill
Additional contact information
Assa Cohen: https://www.yu.edu/faculty/pages/cohen-assa

No 24-22, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We develop a search-theoretic model of a dealer-intermediated over-the-counter market. Our key departure from the literature is to assume that, when a customer meets a dealer, the dealer can sell only assets that it already owns. Hence, in equilibrium, dealers choose to hold inventory. We derive the equilibrium relationship between dealers’ costs of holding assets on their balance sheets, their optimal inventory holdings, and various measures of liquidity, including bid-ask spreads, trade size, volume, and turnover. Using transaction-level data from the corporate bond market, we calibrate the model to quantitatively assess the impact of post-crisis regulations on dealers’ inventory costs, liquidity, and welfare.

Keywords: Over-the-counter markets; intermediation; liquidity; dealer inventory; financial regulation (search for similar items in EconPapers)
JEL-codes: G11 G12 G21 (search for similar items in EconPapers)
Pages: 61
Date: 2024-12-09
New Economics Papers: this item is included in nep-dge and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... ers/2024/wp24-22.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:99245

Ordering information: This working paper can be ordered from

DOI: 10.21799/frbp.wp.2024.22

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().