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Inventory management, dealers’ connections, and prices in OTC markets

Jean-Edouard Colliard (), Thierry Foucault and Peter Hoffmann

No 2529, Working Paper Series from European Central Bank

Abstract: We propose a new model of trading in OTC markets. Dealers accumulate inventories by trading with end-investors and trade among each other to reduce their inventory holding costs. Core dealers use a more efficient trading technology than peripheral dealers, who are heterogeneously connected to core dealers and trade with each other bilaterally. Connectedness affects prices and allocations if and only if the peripheral dealers’ aggregate inventory position differs from zero. Price dispersion increases in the size of this position. The model generates new predictions about the effects of dealers' connectedness and dealers' aggregate inventories on prices. JEL Classification: G10, G12, G19

Keywords: interdealer trading; inventory management; OTC markets (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-fmk and nep-mst
Note: 1137913
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Related works:
Working Paper: Inventory Management, Dealers' Connections, and Prices in OTC Markets (2018) Downloads
Working Paper: Inventory Management, Dealers' Connections, and Prices in OTC Markets (2018) Downloads
Working Paper: Inventory Management, Dealers' Connections, and Prices in OTC Markets (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212529

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