OTC Intermediaries

Andrea L. Eisfeldt (andrea.eisfeldt@anderson.ucla.edu), Bernard Herskovic (bernard.herskovic@anderson.ucla.edu), Sriram Rajan (sriram.rajan@ofr.treasury.gov) and Emil Siriwardane (esiriwardane@hbs.edu)
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Andrea L. Eisfeldt: University of California, Los Angeles
Bernard Herskovic: University of California, Los Angeles
Sriram Rajan: Office of Financial Research
Emil Siriwardane: Harvard Business School

No 18-05, Working Papers from Office of Financial Research, US Department of the Treasury

Abstract: We study the effect of dealer exit on prices and quantities in a model of an over-the-counter (OTC) market featuring a core-periphery network with bilateral trading costs. The model is calibrated using regulatory data on the entire U.S. credit default swap (CDS) market between 2010-2013. Prices depend crucially on the risk-bearing capacity of core dealers, yet unlike standard models featuring a dealer sector, we allow for heterogeneity in dealer risk-bearing capacity. This heterogeneity is quantitatively important. Depending on how well dealers share risk, the exit of a single dealer can cause credit spreads to rise by 8 to 24%.

Keywords: OTC markets; networks; intermediaries; dealers; credit default swaps; risk sharing (search for similar items in EconPapers)
Pages: 67 pages
Date: 2018-08-29, Revised 2021-05-24
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