Inventory Management, Dealers' Connections, and Prices in OTC Markets

60 Pages Posted: 10 Jul 2018 Last revised: 13 Dec 2019

See all articles by Jean-Edouard Colliard

Jean-Edouard Colliard

HEC Paris - Finance Department

Thierry Foucault

HEC Paris - Finance Department

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research

Multiple version iconThere are 2 versions of this paper

Date Written: December 13, 2019

Abstract

We propose a new model of trading in OTC markets. Dealers accumulate inventories by trading with end-investors and trade among each other to reduce their inventory holding costs. Core dealers have access to a more efficient trading technology than peripheral dealers, who are heterogeneously connected to core dealers and trade with each other bilaterally. Connectedness affects prices and allocations if and only if the peripheral dealers' aggregate inventory position differs from zero. The resulting price dispersion increases in the size of this position. The model generates new predictions about the joint effects of peripheral dealers' connectedness and dealers' aggregate inventories on transaction prices, both among dealers and between dealers and their clients.

Keywords: OTC markets, Interdealer trading, Inventory management

Suggested Citation

Colliard, Jean-Edouard and Foucault, Thierry and Hoffmann, Peter, Inventory Management, Dealers' Connections, and Prices in OTC Markets (December 13, 2019). HEC Paris Research Paper No. FIN-2018-1286. Available at SSRN: https://ssrn.com/abstract=3211285 or http://dx.doi.org/10.2139/ssrn.3211285

Jean-Edouard Colliard (Contact Author)

HEC Paris - Finance Department ( email )

France

Thierry Foucault

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
(33)139679569 (Phone)
(33)139677085 (Fax)

HOME PAGE: http://thierryfoucault.com/

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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