Relationship Trading in OTC Markets

46 Pages Posted: 4 Dec 2017

See all articles by Terrence Hendershott

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Dan Li

Federal Reserve Board

Dmitry Livdan

University of California, Berkeley

Norman Schürhoff

University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 12, 2017

Abstract

We examine the network of trading relations between insurers and dealers in the over-the-counter corporate bond market. Comprehensive regulatory data shows that many insurers use only one dealer while the largest insurers have networks of up to forty dealers. Large insurers receive better prices than small insurers. However, execution costs are a non-monotone function of the network size, increasing once the network size exceeds 20 dealers. To understand these facts we build a model of decentralized trade in which insurers trade off the benefits of repeat business against dealer competition. The model can quantitatively fit the distribution of insurers' network sizes and how prices depend on insurers' size.

Keywords: Over-the-counter market, corporate bond, trading cost, liquidity, decentralization, financial network

JEL Classification: G12, G14, G24

Suggested Citation

Hendershott, Terrence J. and Li, Dan and Livdan, Dmitry and Schürhoff, Norman, Relationship Trading in OTC Markets (September 12, 2017). Swiss Finance Institute Research Paper No. 17-30. Available at SSRN: https://ssrn.com/abstract=3051859 or http://dx.doi.org/10.2139/ssrn.3051859

Terrence J. Hendershott

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Dan Li

Federal Reserve Board ( email )

20th and C Streets, NW
Mail Stop 89
Washington, DC 20551
United States

Dmitry Livdan

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 642-4733 (Phone)

Norman Schürhoff (Contact Author)

University of Lausanne ( email )

Extranef 228
CH-1015 Lausanne
Switzerland
+41 (0)21 692 3447 (Phone)
+41 (0)21 692 3435 (Fax)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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