Endogenous Specialization and Dealer Networks

70 Pages Posted: 19 Oct 2015 Last revised: 16 Aug 2018

See all articles by Batchimeg Sambalaibat

Batchimeg Sambalaibat

Indiana University, Kelley School of Business

Date Written: July 30, 2018

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.

Keywords: network formation, core-periphery, clientele effect, specialization, intermediation chains, over-the-counter markets, search frictions

JEL Classification: G10

Suggested Citation

Sambalaibat, Batchimeg, Endogenous Specialization and Dealer Networks (July 30, 2018). Available at SSRN: https://ssrn.com/abstract=2676116 or http://dx.doi.org/10.2139/ssrn.2676116

Batchimeg Sambalaibat (Contact Author)

Indiana University, Kelley School of Business ( email )

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Bloomington, IN 47405
United States

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

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