Dealer costs and customer choice

Lucas Dyskant, André Silva and Bruno Sultanum

No 23-13, Working Paper from Federal Reserve Bank of Richmond

Abstract: We introduce a model to explain how an increase in intermediation costs leads to structural changes in the corporate bond market. We state three facts on corporate bond markets after the Dodd-Frank act: (1) an increase in customer liquidity provision through prearranged matches, (2) a paradoxical decrease in measured illiquidity, and (3) an increase in the illiquidity component on the yield spread. Investors take longer to finish a trade and require higher illiquidity premium even though measured illiquidity decreased. We introduce a search and matching model which explains these facts. It also suggests the possibility of multiple equilibria and financial instability when dealers face high costs to intermediate transactions.

Keywords: over-the-counter markets; intermediation costs; liquidity; corporate bonds; Volcker rule; post-2008 regulation (search for similar items in EconPapers)
JEL-codes: D53 G12 G18 (search for similar items in EconPapers)
Pages: 71
Date: 2023-12
New Economics Papers: this item is included in nep-dge and nep-mst
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