Inferring Intermediary Risk Exposure from Trade

Chris Anderson () and Weiling Liu ()
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Chris Anderson: Division of Supervision & Regulation, Federal Reserve Board, Washington, District of Columbia 20551
Weiling Liu: Department of Finance, Northeastern University, Boston, Massachusetts 02115

Management Science, 2024, vol. 70, issue 10, 6966-6982

Abstract: We propose a novel measure of intermediary risk exposure based on the fraction of all trade that is conducted between dealers, called the interdealer trade (IDT) measure. Intuitively, when dealers’ aggregate risk exposure rises, they trade more with each other to redistribute inventory shocks. Consistent with risk exposures relating to expected returns, market-specific IDT measures add incremental return predictability across five different markets. For example, one-standard-deviation increases in the Treasury and foreign exchange (FX) IDT measures, respectively, forecast a 1.8% higher annual excess return on a five-year bond and a 3.7% higher annual excess return on currency-specific FX trades.

Keywords: financial regulation; financial intermediation; finance: asset pricing; bond markets (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:10:p:6966-6982

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