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Journal of Finance Vol. 75 No. 2 2020

Relationship Trading in Over‐the‐Counter Markets

Terrence Hendershott; Dan Li; Dmitry Livdan; Norman Schürhoff1,2,3,4,5,6

1 National Research University Higher School of Economics · 2 U.S. National Science Foundation · 3 Federal Reserve · 4 Johns Hopkins University · 5 University of Illinois Chicago · 6 Marymount University

Abstract

We examine the network of trading relationships between insurers and dealers in the over‐the‐counter (OTC) corporate bond market. Regulatory data show that one‐third of insurers use a single dealer, whereas other insurers have large dealer networks. Execution prices are nonmonotone in network size, initially declining with more dealers but increasing once networks exceed 20 dealers. A model of decentralized trade in which insurers trade off the benefits of repeat business and faster execution quantitatively fits the distribution of insurers' network size and explains the price–network size relationship. Counterfactual analysis shows that regulations to unbundle trade and nontrade services can decrease welfare.

DOI
10.1111/jofi.12864
Volume
75
Issue
2
Pages
683-734
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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