OTC Intermediaries

Andrea L. Eisfeldt; Bernard Herskovic; Sriram Rajan; Emil Siriwardane

doi:10.1093/rfs/hhac062

Review of Financial Studies Vol. 36 No. 2 2023

OTC Intermediaries

Andrea L. Eisfeldt¹; Bernard Herskovic¹; Sriram Rajan²; Emil Siriwardane³

¹ University of California-Los Angeles and NBER , USA · ² United States Department of the Treasury Office of Financial Research, , USA · ³ Harvard Business School and NBER , USA

Abstract

We study the effect of dealer exit on prices and quantities in a model of an over-the-counter 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 and 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%.

DOI: 10.1093/rfs/hhac062
Volume: 36
Issue: 2
Pages: 615-677
Language: en
Sources: bibtex:phds-export.bib openalex crossref

OTC Intermediaries

Abstract

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