Relationship Trading in OTC Markets

Schürhoff, Norman, Terrence Hendershott, Dmitry Livdan and Dan Li
Authors registered in the RePEc Author Service: Norman Schuerhoff

No 12472, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine the network of trading relations between insurers and dealers in the over-the-counter corporate bond market. Comprehensive regulatory data shows that many insurers use only one dealer while the largest insurers have networks of up to forty dealers. Large insurers receive better prices than small insurers. However, execution costs are a non-monotone function of the network size, increasing once the network size exceeds 20 dealers. To understand these facts we build a model of decentralized trade in which insurers trade off the benefits of repeat business against dealer competition. The model can quantitatively fit the distribution of insurers’ network sizes and how prices depend on insurers’ size.

Keywords: Over-the-counter market; Corporate bond; Trading cost; Liquidity; Decentralization; Financial networks (search for similar items in EconPapers)
JEL-codes: G12 G14 G24 (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-fmk and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Working Paper: Relationship Trading in OTC Markets (2017)
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