Endogenous Specialization and Dealer Networks

Batchimeg Sambalaibat and Artem Neklyudov
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Batchimeg Sambalaibat: Indiana University
Artem Neklyudov: University of Lausanne and SFI

No 1041, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: OTC markets exhibit a core-periphery network: 10-30 central dealers trade frequently and with many dealers, while hundreds of peripheral dealers trade sparsely and with few dealers. Existing work rationalize this phenomenon with exogenous dealer heterogeneity. We build a search-based model of network formation and propose that a core-periphery network arises from specialization. Dealers endogenously specialize in different clients with different liquidity needs. The clientele difference across dealers, in turn, generates dealer heterogeneity and the core-periphery network: The dealers specializing in clients who trade frequently form the core, while the dealers specializing in buy-and-hold investors form the periphery.

Date: 2016
New Economics Papers: this item is included in nep-dge, nep-mst and nep-net
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1041

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