Bid-Ask Spreads and the Over-the-Counter Interdealer Markets: Core and Peripheral Dealers

Artem Neklyudov
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Artem Neklyudov: Universite de Lausanne

Review of Economic Dynamics, 2019, vol. 33, 57-84

Abstract: This paper studies heterogeneity in search technology among dealers in an over-the-counter (OTC) market. Empirical evidence suggests that in many OTC markets dealer networks have a core-peripheral structure with customer bid-ask spreads depending on whether a customer trades with a more central dealer or a more peripheral dealer. The paper develops a baseline search and matching model, which produces a robust centrality discount—lower bid-ask spreads offered by more central dealers. When dealers are allowed to move sufficient amounts of trading capital between their idiosyncratic states the same model parameters may produce a centrality premium. Numerical analysis of the model shows the effects of different underlying distributions of the heterogeneity in search technology on dealer networks and welfare. (Copyright: Elsevier)

Keywords: Over-the-counter markets; Dealer networks; Decentralized trading; Bid-ask spreads; Liquidity; Market quality (search for similar items in EconPapers)
JEL-codes: G12 G23 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (24)

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DOI: 10.1016/j.red.2019.04.005

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