Dealers' Insurance, Market Structure, And Liquidity

Francesca Carapella and Cyril Monnet

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: We develop a parsimonious model to study the equilibrium structure of over-the- counter securities markets. We show that regulations aimed at reducing counterparty risk and improving liquidity can be inecient. Such regulations have a direct posi- tive e ect on entry in those markets, thus fostering competition and lowering spreads. Greater competition, however, has an indirect negative e ect on market making prof- itability, this e ect being stronger on more ecient intermediaries. Thus, general equi- librium e ects result in reduced incentives of all intermediaries to invest in ecient technologies and can cause a social welfare loss. The equilibrium outcome is consis- tent with some empirical findings on the e ects of post-crisis regulations and with the observed resistance by some market participants to those regulations.

Keywords: Liquidity; dealers; insurance; central counterparties (search for similar items in EconPapers)
JEL-codes: G11 G23 G28 (search for similar items in EconPapers)
Date: 2018-07
New Economics Papers: this item is included in nep-ias
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Related works:
Journal Article: Dealers’ insurance, market structure, and liquidity (2020)
Working Paper: Dealers' insurance, market structure, and liquidity (2020)
Working Paper: Dealers' Insurance, Market Structure, And Liquidity (2017)
Working Paper: Dealers' Insurance, Market Structure And Liquidity (2013)
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