What Makes Dealers Central? Evidence from Credit Interdealer Networks

41 Pages Posted: 4 Sep 2017 Last revised: 10 Jun 2018

See all articles by Benjamin Munyan

Benjamin Munyan

Vanderbilt University - Finance

Sumudu W. Watugala

Cornell University - SC Johnson College of Business

Date Written: June 1, 2018

Abstract

We present a novel method for identifying the effect of search costs, risk appetite, and skill in explaining the differences between core and periphery dealers in the U.S. corporate bond market. Using a hand-constructed dataset that matches the trading activity of credit dealers in corporate bonds and positions from trading in CDS markets, we investigate the interdealer network structure at the bond-issuer level across both markets. We analyze the mean, volatility, and skewness of market-making returns to test theoretical predictions on dealer centrality and the distribution of their profit. Bond dealer centrality is associated with greater skill and risk appetite. More central dealers appear to have significantly less negative skewness in their trading returns, indicative of their ability to avoid bad trades. Bond underwriters, who have a search advantage, exhibit even less negative skewness, but lower mean and volatility of profits. Taken together, the moments of trading returns reveal a dealer's role in a market. These findings inform our understanding of regulatory policies such as the Volcker rule which target dealer trading in OTC markets.

Keywords: Bonds, CDS, networks, centrality, information, dealers

JEL Classification: G10, G12, G13, G14

Suggested Citation

Munyan, Benjamin K. and Watugala, Sumudu W., What Makes Dealers Central? Evidence from Credit Interdealer Networks (June 1, 2018). Available at SSRN: https://ssrn.com/abstract=3031668 or http://dx.doi.org/10.2139/ssrn.3031668

Benjamin K. Munyan (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Sumudu W. Watugala

Cornell University - SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

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