OTC Intermediaries

68 Pages Posted: 10 Sep 2018 Last revised: 28 May 2021

See all articles by Andrea L. Eisfeldt

Andrea L. Eisfeldt

UCLA Anderson School of Management

Bernard Herskovic

University of California, Los Angeles (UCLA) - Anderson School of Management

Sriram Rajan

Government of the United States of America - Office of Financial Research

Emil Siriwardane

Harvard Business School - Finance Unit

Date Written: August 29, 2018

Abstract

We study the effect of dealer exit on prices and quantities in a model of an over-the-counter (OTC) market featuring a core-periphery network with bilateral trading costs. The model is calibrated using regulatory data on the entire U.S. credit default swap (CDS) market between 2010-2013. Prices depend crucially on the risk-bearing capacity of core dealers, yet unlike standard models featuring a dealer sector, we allow for heterogeneity in dealer risk-bearing capacity. This heterogeneity is quantitatively important. Depending on how well dealers share risk, the exit of a single dealer can cause credit spreads to rise by 8 to 24%.

Keywords: OTC markets, networks, intermediaries, dealers, systemic risk, credit default swaps

JEL Classification: G01, G19, L14

Suggested Citation

Eisfeldt, Andrea L. and Herskovic, Bernard and Rajan, Sriram and Siriwardane, Emil, OTC Intermediaries (August 29, 2018). Office of Financial Research Research Paper No. 18-05, Available at SSRN: https://ssrn.com/abstract=3245966 or http://dx.doi.org/10.2139/ssrn.3245966

Andrea L. Eisfeldt

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://https://sites.google.com/site/andrealeisfeldt/

Bernard Herskovic

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

Los Angeles, CA 90095-1481
United States

HOME PAGE: http://bernardherskovic.com

Sriram Rajan (Contact Author)

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

Emil Siriwardane

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

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